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Marcellus Shale Gas — Environmental Due Diligence

Shell, Chevron, Exxon Mobil Corp. and other major oil companies are expanding their positions in natural gas in North America. The billions of dollars in these deals adds to the growing list of companies establishing positions in major unconventional natural gas plays such as the Marcellus Shale play in Pennsylvania and New York.

The performance of environmental due diligence has become an essential part of today's oil and gas industry merger and acquisitions. The ultimate reason for performing environmental due diligence is to quantify the liabilities and associated costs while protecting the buyer against future claims.

Environmental due diligence usually consists of two parts; the inside audit and the outside Phase I-type assessment.

The inside environmental audit is an examination of the seller's internal records to make sure they show that the appropriate environmental reports have been filed with the proper governmental agencies and that files on environmental matters have been properly maintained. The inside audit is essentially a due diligence search of the seller's files.

The Phase I Environmental Site Assessment (ESA) process is typified by ASTM E1527 - 05 Standard Practice for Environmental Site Assessments. The Phase I under ASTM E1527-05 is intended to permit a user to satisfy one of the requirements to qualify for the innocent landowner, contiguous property owner, or bona fide prospective purchaser limitations on liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (42 U.S.C. 9601) and petroleum products.

The applicability of the ASTM standard may be limited depending on whether the CERCLA petroleum exclusion applies. In any event, the ASTM Standard doesn't require the following to be addressed: Asbestos, Lead Based Paint, Drinking Water, Wetlands, Endangered Species, Mold, Radon Gas, NORM, Regulatory Compliance, Health & Safety, and Cultural or historic sensitivities. Therefore, the typical Phase I is often modified for oil and gas industry transactions.

Typical oil and gas industry concerns include:

  • Spills from Tank Systems and Pipelines
  • Unplugged and Abandoned Wells
  • Mercury and PCBs from Pump Stations
  • Former Drilling or Blowdown Pits
  • Waste Management and Disposal
  • Air and Water Discharge Permits
  • NORM Wastes
  • Produced Water Disposal
  • Hydrogen Sulfide
  • Endangered Species and Wetlands

Five quick tips for performing environmental due diligence:

  1. Determine to what extent environmental liabilities will be factored into a transaction.
  2. Determine which type of due diligence needs to be completed. An ASTM Phase I Environmental Assessment is generally conducted for financial institutions. However, many financial institutions have their own scope and/or additional requirements.
  3. Have the seller package information with a cover memo and supporting documents prior to initiating the due diligence process and identify the company representatives knowledgeable of operational and environmental issues.
  4. Establish management's role during the inspection period. Determine who will access records, correspond with regulatory agencies, make waste disposal arrangements and handle reporting procedures if problems are uncovered.
  5. Hire a reputable environmental consultant that is familiar with the industry to conduct Phase I ESAs and compliance audits.

TDS Pennsylvania

The new Department of Environmental Protection rules set a limit of 500 milligrams per liter of total dissolved solids (TDS) and 250 mg/l of chlorides for new discharges of natural gas wastewater into streams and rivers. All other types of wastewater are capped at 2,000 mg/l for TDS.

The rules come after instances in the past two years in which the Monongahela River showed levels of TDS above 500 mg/l at drinking water intakes during very low flow periods, resulting in general complaints regarding the taste of the water. After initial finger pointing, DEP eventually acknowledged that oil and gas wastewater discharges were not the cause of the high TDS levels.

PIOGA highlighted these points:

  • The regulations will increase the cost of water disposal by 150-300 percent. The resulting burdens on oil and gas producers will either limit the number of wells they drill or force them out of business.
  • The high TDS problem in the Monongahela River is repeatedly cited, but an independent study showed the cause of the elevated TDS levels to be high sulfates, which are predominately found in acid mine drainage. Still, the natural gas industry is held to a tighter standard than any other discharge source.
  • DEP continually claims that “new technologies” will come forward as a solution for treating oil and gas wastewater. But these technologies are still in their infancy and have not proven to be an economical means of treating the industry's wastewater.

Additionally, more landfills, disposal sites and trucking will be necessary to dispose of enormous amounts of residual waste. The department has neglected to address the environmental impacts of these activities.

  • The regulations will significantly reduce the expansion of the Marcellus Shale play and conventional gas production, leading to the loss of much-needed jobs throughout the Commonwealth.
  • PIOGA questions the legality and constitutionality of the proposed regulation as DEP acts to significantly restrict the expansion of the natural gas industry in Pennsylvania and puts our production at a competitive disadvantage compared to other shale-producing states.

Another new DEP also took effect changing erosion and sediment control requirements to set a 150-foot buffer for activities occurring along high-quality streams.

Delaware River Basin Commission

October 15, 2010 Update:
The draft natural gas regulations are not yet ready for public distribution. The commissioners are working with staff to continue refining the draft regulations to ensure protection of basin waters while minimizing regulatory duplication. The draft regulations will likely be published in November or December 2010, and will be accompanied by a public rulemaking process. This process will entail two public hearings and a written comment period.