Legal Issues and Litigation Arising in Shale Gas Development

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					Legal Issues and Litigation Arising in Shale Gas

 By Brit T. Brown, Benjamin A. Escobar, John K. Broussard, and
 James E. Rogers

 The following is an expanded list of the sample notable cases, expectations of future legal
 issues, and contemplated and recent legislative developments regarding hydraulic fracking
 for use in conjunction with Beirne Maynard & Parsons, L.L.P.’s presentation. If you have
 any further questions, we invite you to contact us for more information.

                       FROM SHALE GAS DEVELOPMENT

           Shale exploration and development attracts significant regulatory and legislative
    responses, as well as litigation. It will come as no surprise to trial lawyers that the
    introduction into the marketplace of projects as massive and both technologically and
    labor intensive as those associated with shale development on a national scale has
    brought a formidable array of litigation challenges. Appendix 1 is titled: “A Survey of
    Legal Challenges Encountered in Shale Development” and reflects a selected, short-
    hand survey of legal challenges faced by clients and counsel involved in recent shale
    development projects.

           The Types of Cases:

           The actions accruing in these shale plays are diverse. We recently surveyed some 47
    cases that arise from shale gas developments, and these 47 are a representative cross-
    section of the types of lawsuits we have seen nationally. The 47 surveyed disputes included:

                  Seventeen alleging breaches of lease agreements.

                  Fourteen alleging water contamination claims due to fracking.

                  Two plaintiffs brought nuisance actions, alleging excessive emissions,
                   noise, and light from drilling were interfering with enjoyment of their

                  Two claims—one from a municipality and another from an environmental
                   group—sought a complete ban of drilling in a specific region.

                                                                       Current as of October 2011
             Two claims are personal injury actions by former drilling company
              employees (one by some who handled hazardous fracking materials, the other
              arising out of a fire plaintiffs allege would have been avoided had the drilling
              company properly monitored gas levels).

             Fourteen were either originally brought in or removed to federal court.

        Other claims include, but are not limited to: suit by drilling company to enjoin
municipality’s enforcement of a fracking ban; suit by individual homeowners to recover
damages sustained in an earthquake allegedly caused by fracking; suit by municipality to
recover for damages to roads caused by drilling company vehicles; suit by drilling company
against municipality for denial of setback variances; and suits against drilling companies for
violations of the Clean Water, National Environment Policy, and Federal Resource
Conservation and Recovery Acts. Barnett shale plaintiffs have also alleged violations of the
Texas Uniform Electronic Transactions Act.

       Who is involved?

        Not surprisingly, the active plaintiff attorneys have offices near the shale play from
which the dispute arises. For example, the North Texas Litigation Group are counsel for
plaintiffs in a large number of disputes arising out of the Barnett shale, nine of which were
included in our review. The group has over 100 petitions for Barnett shale actions archived
on its website.

       Unlike the mature shale plays, Eagle Ford’s litigation scene has not been fully
developed. However, reports from the burgeoning play have detailed complaints of water
contamination, excess emissions, road damage, and lease disputes. Furthermore, plaintiffs’
attorneys have publicized their services to residents in the Eagle Ford region.

       Some of the plaintiffs’ attorneys more frequently involved—or attempting to become
involved through advertising and press releases—are listed below (with location and
primary practice area).

       Allen Stewart, P.C. (Dallas, Personal Injury)
       Arnold & Itkin, LLP (Houston, Personal Injury and General Litigation)
       Becnel Law Firm, LLC (New Orleans, Personal Injury)
       Claunch Law Firm (Fort Worth, Personal Injury)
       Davidson, Jones & Summers (Shreveport, General Civil Practice)
       Duke A McDaniel Petersburg, Virginia, General Law)
       Levene, Gouldin &. Thompson New York (Litigation, Oil and Gas, Personal
       Napoli Bern Ripka &, Associates New York (Environmental Litigation)
       Neblett, Beard & Arsenault Alexandria, LA (Personal Injury)

                                                                    Current as of October 2011
  North Texas Litigation Group (Dallas, Texas) (consists of Petroff & Associates,
  Riddle & Williams, P.C., and Mathis & Donheiser, P.C.)
  Turley Law Firm Dallas, Texas (Personal Injury)
  Zarwin Baum DeVito Kaplan Schaer Toddy, PC (Philadelphia, PA,

                II.   RECENT NOTABLE CASES (TEXAS)

1. Range Resources litigation

  A. Timeline of Original EPA Suit

   (i)   Dec. 7, 2010: the EPA issued to Range Resources an emergency
         administrative order pursuant to the Safe Water Drinking Act (§1431)
         finding an imminent and substantial endangerment to public health.
   (ii) EPA’s Findings of Fact included: (1) that certain contaminants in the two
        domestic water wells “may present an imminent and substantial
        endangerment to the health of persons.”; (2) that the presence of one of
        these contaminants in the domestic water wells is “likely to be due to
        impacts from gas development and production activities in the area,” and
        (3) that two gas wells operated by Range “are the only gas production
        facilities within approximately 2,000 feet of the domestic wells.”
   (iii) The order does not contain a finding of fact that Range actually caused or
         contributed to the alleged contamination of the domestic water wells or to
         the alleged endangerment.
   (iv) The EPA administrative order specifically requires Range to: (1) provide
        replacement potable water supplies for the consumers of water from the
        domestic water wells; (2) install explosivity meters in the dwellings served
        by the domestic water wells; and (3) develop and submit a plan to: (a)
        identify gas flow pathways to the Trinity Aquifer; (b) eliminate gas flow to
        the aquifer, if possible; and (c) remediate areas of the aquifer that are
   (v) Dec. 8, 2010: the Texas Railroad Commission (TRRC) held a hearing to
       determine if Range was contaminating the water. The EPA refused to allow
       its personnel to testify, produce documents, or to participate in the TRRC
       hearing to defend its order.
   (vi) January 18, 2011: the EPA sued Range in Federal Court to enforce its
   (vii) March 7, 2011: the TRRC issued a proposal for decision (PFD) finding that
         Range’s operations have not caused or contributed to the contamination of
         the domestic water wells.
   (viii)March 21, 2011: Range filed a motion to dismiss the EPA action brought in
         January. Range argued that the EPA failed to state a claim by not pleading

                                                            Current as of October 2011
        the requisite elements necessary to satisfy due process or facts necessary to
        state a claim for relief.
  B. Federal District Court case stayed pending Fifth Circuit ruling

  (i)   June 20, 2011: the District Court denied the motion without prejudice and
        stayed the matter until the Fifth Circuit made a ruling on Range’s Petition,
        which presents similar issues of fact and law. Range’s Petition in the Fifth
        Circuit argues: (1) the EPA order is not final agency action and that the EPA
        has the burden of proving the essential elements of a claim under the
        SDWA; (2) Range has the right to assert any applicable defenses and
        constitutional challenges; and (3) the EPA’s order is arbitrary and capricious
        because of insufficient evidence to support the finding that Range
        contaminated the water.
  (ii) The Fifth Circuit held oral argument on October 3, 2011 before Judges
       Reavley, Elrod, and Graves. A decision is expected by year-end.
  C. Landowners File Suit

  (i)   June 2011: the Lipskys, the landowners whose water well is the subject of
        the EPA action, filed suit against Range directly, seeking $6.5 million for
        actual damages and mental anguish. The suit is pending in Parker County
        district court, Judge Trey Lofton (recent Gov. Perry appointee with criminal
        law background).
  (ii) July 14, 2011: Range filed a $3 million counterclaim against the
       landowners (the Lipskys) and a third-party claim against Alisa Rich, the
       owner of a company called Wolf Eagle Environmental. Range’s claim alleges
       that the Lypskys and Rich conspired to create misleading test results and
       disparage Range Resources. Range’s counterclaim includes deposition
       testimony from Mr. Lypsky admitting that gas was present in his drinking
       water years prior to Range’s drilling. The Lypskys and Rich have not
       responded to the counterclaim.

2. Coastal Oil & Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex.

  (i)   In a long-awaited opinion, the court held that the rule of capture prevented
        adjacent-tract royalty interest owners from recovering trespass damages
        against the well-operator of fracking operations. The opinion reversed a
        judgment of approximately $620,000 in actual damages and $10 million in
        punitive damages.
  (ii) As stated by the court, the primary issue was “whether subsurface hydraulic
       fracturing of a natural gas well that extends into another’s property is a
       trespass for which the value of gas drained as a result may be recovered as
       damages. We hold that the rule of capture bars recovery of such damages.”

                                                             Current as of October 2011
   (iii) The court also held that mineral lessors with a reversionary interest have
         standing to bring an action for subsurface trespass causing actual injury.
         Thus, the court did not rule out the possibility of a breach of implied lease or
         breach of implied covenant to produce a claim—only ruling that there was
         no evidence on the record to support such a finding because the plaintiffs’
         harm was attributable only to the increased drainage, not the actual physical
         trespass of the fracturing fluids and proppants. The court did not make clear
         exactly what evidence would be required to make such a claim.

3. FPL Farming v. Environmental Processing Systems, No. 09-1010
   (Tex. Aug. 26, 2011-2011), available at

   (i)   The Injection Well Act and Texas Administrative Code do not shield permit
         holders from civil tort liability resulting from actions governed by the
         permit—i.e., “the mere fact that an administrative agency issues a permit to
         undertake an activity does not shield the permittee from third party tort
         liability stemming from consequences of the permitted activity.” Thus,
         merely having a permit is not a shield from trespass claims.
   (ii) The court avoided the issue of whether subsurface wastewater migration can
        constitute a trespass and whether it did so in this case.

4. Scoma v. Chesapeake Energy Corp.; (Fed. Ct., N.D. Tex., 3:10-cv-01385-N)

   (i)   Plaintiffs (husband and wife homeowners) describe the effects of the
         contamination as an intermittent orange/yellow coloring of the water, bad
         taste, and foul odor. Plaintiffs allege an increase in the concentration of
         “harmful petroleum byproducts, such as benzene, toluene, ethylbenzene,
         xylene, barium, and iron” due to fracking operations.
   (ii) Plaintiffs’ causes of action are for nuisance, trespass, and negligence.
        Plaintiffs’ counsel is the Turley Law Firm. Trial was recently re-set for April

5. Mitchell v. Encana Oil & Gas (USA), Inc.; (Fed. Ct., N.D. Tex., 3:10-cv-

   (i)   Plaintiff (landowner) filed suit Dec. 15, 2010 and is represented by the
         Turley law Firm. Plaintiff’s complaint alleges that her well water began to
         feel slick to the touch and give off an oily, gasoline-like odor in May 2010.
         Plaintiff alleges that testing results performed on the groundwater
         confirmed it was contaminated with various chemicals, including C-12-C28
         hydrocarbons, similar to diesel fuel.

                                                               Current as of October 2011
   (ii) Chesapeake defendants have filed a motion to dismiss.

6. Harris v. Devon Energy Production Company, L.P.; (Fed. Ct., E.D. Tex.,

   (i)   Plaintiffs (husband and wife homeowners) filed suit Dec. 15, 2010 and are
         represented by the Turley law Firm. Plaintiffs allege water from two wells on
         plaintiffs’ property became contaminated in April 2008 with a gray
         sediment, rendering the wells unusable. Plaintiffs claim to have testing
         results performed on the well water showing water contamination with high
         levels of metals: aluminum, arsenic, barium, beryllium, calcium, chromium,
         cobalt, copper, iron, lead, lithium, magnesium, manganese, nickel,
         potassium, sodium, strontium, titanium, vanadium, and zinc.
   (ii) Defendants’ motion for summary judgment was denied without prejudice of
        re-filing in August 2011. The court ruled the MSJ was premature because
        insufficient discovery had been conducted.

                III.   SAMPLE OF NOTABLE CASES (U.S.)

1. Cabot Oil & Gas (U.S. District Court, Middle District of Pennsylvania, 3:09-cv-

   A. Case Summary

   Plaintiffs—63 individuals—reside in Dimock and Montrose, PA. All of them
   executed leases with Cabot to extract natural gas. Plaintiffs allege that Cabot
   improperly conducted hydro-fracturing operations causing contamination to the
   water supply, including causing the release of gas into the headspaces of the
   water wells, dissolved methane in the water table, pollutants in the water wells,
   diesel fuel spilled on the ground near the residences, discharge of drilling mud
   into diversion ditches, multiple explosions in Plaintiffs’ water wells,
   misrepresentations and fraud in the procurement of the natural gas leases, and
   PDEPA violations causing the state government to shut down Cabot’s operations.
   B. Plaintiffs’ Counsel:

   Napoli Bern Ripka & Associates, LLP, The Jacob D. Fuchsberg Law Firm, and
   Zarwin Baum DeVito Kaplan Schaer Toddy
   C. Defense Counsel:

   K&L Gates – Pittsburgh
   D. Claims:

   (i)   Hazardous Site Cleanup Act: 35 PS §§ 6020.101-6020;

                                                              Current as of October 2011
   (ii) Negligence;
   (iii) Private nuisances;
   (iv) Strict liability;
   (v) Breach of contract;
   (vi) Fraudulent misrepresentation, and
   (vii) Gross negligence (dismissed).
  E. Case Status:

   (i)   The Plaintiffs have survived a strong motion to dismiss with a detailed order
         issued on November 15, 2010, holding that they had sufficiently pled each of
         their causes of action except for “gross negligence” (as that claim is not
         recognized as an independent tort under Pennsylvania law). Plaintiffs’
         claims for punitive damages, however, remained viable.
   (ii) Plaintiffs also prevailed on a TRO requiring the immediate cessation of
        drilling activities and are in the process of collecting fees from the
        Defendants for that proceeding
   (iii) Parties initially planned for a trial in September 2011, but have been slowed
         by several discovery disputes, and are now set for an April 2012 trial.

2. Anschutz Exploration Corporation (New York Supreme Court (Trial Court),
   Chemung County)

  A. Case Summary

  Plaintiffs filed suit on February 14, 2011. Plaintiffs (9 families) in the Elmira, New
  York area claim that the Anschutz Exploration Corporation contaminated their
  drinking water through natural gas drilling operations in the area. The Plaintiffs
  claim that the contamination occurred as a result of improper fracking

  Defendants have mounted a vigorous PR campaign against these allegations,
  pointing out that no fracking was ever conducted on gas wells in the area, as it
  has been against the law for some years. Further, the “Trenton Black River shale
  formation” is a factual error, as that formation is a limestone deposit, not a shale
  deposit. Defendants are also raising issues that:

            (i)   Shallow, naturally occurring methane has been evident in the
                  region for decades. Local water quality has been a long-standing
                  issue – far predating initiation of drilling between February and
                  March 2010;
            (ii) “New York City plaintiffs’ lawyers filed this lawsuit, even before the
                 state DEC and county health officials had concluded their inquiries

                                                              Current as of October 2011
               … and are soliciting clients to sue other energy companies
               throughout the country;”
          (iii) “[t]the lawsuit should be seen as part of a broader campaign against
                the domestic energy industry by a handful of lawyers who are also
                trying to give themselves a shocking $500+ million payday.” – from
                Anschutz Press Statement, dated February 15, 2011.
  B. Plaintiffs’ Counsel:

   Napoli Bern Ripka & Associates, LLP (same as Cabot);
  C. Anschutz stays on offense and sues to lift drilling ban

  On September 16, 2011, Anschutz filed suit against Dryden, a rural suburb of
  Ithaca with about 13,000 residents that previously amended its zoning laws to
  bar all gas drilling within its borders. The Anschutz suit seeks to invalidate the
  amendment. Anschutz owns more than 22,000 acres of land in Dryden, and
  claims that New York's Environmental Conservation Law bars local governments
  from any further regulation of drilling. Dryden (and other NY towns) counter by
  arguing that state law prohibits them only from regulating the drilling itself, but
  not from saying where or whether it can take place.

  (New York’s Department of Environmental Conservation has recommended
  ending a year-long ban on drilling in New York, although a public comment
  period on the rules was extended to December.)

3. Northeast Natural Energy, LLC v. Morgantown (Civil Action No. 11-C-411,
   Circuit Court of Monangalia County, West Virginia)

  The City of Morgantown enacted an ordinance banning hydraulic fracturing
  within the City and anywhere within one mile of the City. Northeast Natural
  Energy had previously received a permit from the West Virginia Department of
  Environmental Protection to drill and hydraulically fracture a Marcellus Shale
  well in an area within one mile of the city limits of Morgantown. Northeast
  claimed that the City's ordinance was preempted by state law and therefore was
  Northeast obtained summary judgment overturning the fracking ban on August
  12, 2011, based largely on preemption principles. The court explained that the
  local ordinance cannot contravene state law and that the state government had
  enacted a comprehensive state regulatory program that preempts any local
  ordinance that is inconsistent with state law. Because the Morgantown ordinance
  banned hydraulic fracturing altogether—even if the processes were authorized by
  the state agencies—the ordinance was invalid.

                                                            Current as of October 2011

A.   More fracking “contamination” and “pollution cases:” Plaintiffs’
     attorneys have made it clear that they intend to exploit this niche market—
     particularly given the recent press regarding the documentary Gasland. Success
     or failure of cases like the trio mentioned above will also affect future filings.

B.   Possible Breach of Implied Covenant and Implied Lease Obligation
     Cases: The Texas and Oklahoma cases have not completely ruled out the
     possibility that improper actions in fracking natural gas wells could lead to claims
     for breach of a covenant for damages – other courts may follow suit. The problem
     for such suits in Texas is proving damages, but that is not enough of a legal
     hurdle to prevent filing and pursuing such claims.

C.   Straight Personal Injury and Property Damage Cases: It seems likely
     that a straight negligence action could be made under most states’ laws for
     personal injury and tangible property damage that resulted from negligent
     fracking operations—of course, it would require likely expert causation to
     establish sufficient evidence to survive appeal.

D.   Possible “Stigma Damage” Cases: Some states have not foreclosed the
     possibility of “Stigma Damage” cases where one or a group of plaintiffs claim a
     lump sum diminution in value to their real property based upon some alleged
     tortuous conduct.

     In the environmental context, these can be based upon remediated
     contamination – and sometimes even proximity of uncontaminated land to
     contaminated land. It is not unusual for a plaintiff in a property contamination
     case to seek both cost of repair damages and loss of market value damages. On its
     face, such a request appears to be an effort to obtain a duplicate recovery.

     The plaintiff typically justifies this request by asserting that, even after
     remediation, the property will still be worth less than it was before it was
     contaminated because: (1) the remediation will not completely remove all
     contamination; or (2) even if the remediation is completely successful, the value
     of the property will continue to suffer because of the fact that the property was
     once contaminated.

     Each of these examples is a variation of “stigma” damages. The courts in the
     United States struggle with this type of request for relief because it does not fit
     within the traditional parameters of relief for injury to property.

E.   Municipal Ordinances: Local municipalities, even in jurisdictions
     traditionally favorable to energy companies, have engaged in various efforts to
     block or ban drilling and/or fracking. Some of these recent efforts have been
     unsuccessful (e.g., Morgantown, supra). However, local political pressures may
     prompt further action and attempts to avoid the preemption implications.

                                                                Current as of October 2011
F.   Violations of State / Federal Disclosure Regulations: Nearly all states
     with shale gas developments have enacted some sort of fracking fluid disclosure
     requirement. Those regulations may be preempted by federal regulations, or they
     may be attacked on a state-by-state basis by political groups as not strict enough.
     The resistance by industry on trade secret grounds will be further challenged by
     environmental concerns for transparency. As seen in other areas of law, if the
     state governments do not respond, political / environmental groups will seek
     disclosure through litigation.


A.   Arkansas

     (i)   The Arkansas Oil and Gas Commission (“AOGC”) has adopted a revised set
           of regulations for oil and gas development operations, including hydraulic
           fracking. The new Rule B-19 took effect on January 15, 2011.
     (ii) Under the revised Rule B-19, well operators are required to submit well
          casing plans and cementing information upon application for a permit to
          drill. The new rule also requires monitoring of all casing annuli and notice of
          specified changes in casing pressure that would indicate movement of fluids
          into the annulus.
     (iii) Following the required notice, the AOGC may request additional
           documentation or testing to determine if hydraulic fracking has potentially
           endangered any freshwater zones. The revised rule also establishes certain
           requirements for the handling and storage of waste materials and fluids
           used on-site in hydraulic fracking operations. The AOGC’s revised Rule B-19
           additionally includes specific chemical disclosure requirements.
     (iv) Under the new rule, operators must identify the additives used in fracking a
          well and the rate at which each additive was used as part of their well
          completion reports. The proposed regulations also would require service
          companies to provide reporting about the constituents of additive products.
B.   Colorado

     (i)   In 2008, the COGCC promulgated the amended rules to address impacts
           and concerns related to Colorado’s unprecedented increase in permitting
           any oil and gas production.
     (ii) The revised rules included extensive requirements on well construction
          standards, water protection and waste management. The adopted rule
          revisions also added Rule 205, which requires well operators and service
          companies to provide and maintain certain chemical information related to
          hydraulic fracking. Under the new rule, well operators have to maintain
          inventories at each well site of all chemicals used in drilling operations,

                                                                Current as of October 2011
           including hydraulic fracking. These inventories do not need to include the
           identities of the chemical constituents of proprietary products.
     (iii) However, service companies are required to provide the identities of all
           chemical constituents of additive products contained in fracking fluids used
           on a well if requested by the COGCC’s environmental manager in order to
           respond to a spill of fluid or an allegation from a landowner that his or her
           property has been contaminated.
     (iv) In addition, under Rule 205, service companies must provide medical
          professionals with the identities of the chemical constituents of proprietary
          fracking fluid additives if the information is needed for medical diagnosis or
          treatment, subject to certain confidentiality agreement requirements to
          protect trade secrets from public disclosure.
C.   Louisiana

     (i)   On October 20, 2011, the Louisiana Department of Natural Resources
           adopted a regulation that requires operators to disclose the composition of
           fracturing fluid used in each well fractured in Louisiana. The new
           regulations requires operators to disclose:
                    the volume of hydraulic fracturing fluid used,
                    the types of additives used (for example, biocides, corrosion
                     inhibitors, friction reducers, etc.), as well as the volume of each
                    the trade name and supplier of each additive, and
                    a list of the chemical compounds contained in the additives, along
                     with the maximum concentration of each compound.
     (ii) If the identity of the chemical compound is a trade secret, the operator
          would be excused from identifying the compound, but would be required to
          identify the chemical family to which the compound belongs.
D.   Michigan

     (i)   On May 25, 2011, the Michigan Dept. of Environmental Quality (the “DEQ”)
           announced new requirements to address public concern and increase
           protection. The requirements, issued as New Permitting Instructions by the
           state Supervisor of Wells, include:
     (ii) Changes to water usage oversight: operators will be required to document
          where they plan to get the fresh water used in the process using the DEQ’s
          water withdrawal tool, to ensure that neither surface water nor any
          neighboring water wells are impacted. They also will be required to report
          the total volume of fracturing water recovered during operation.
     (iii) Reporting: DEQ will require operators to disclose all Material Safety Data
           Sheets and will post that information on the department’s Website for

                                                               Current as of October 2011
           public review. The sheets list characteristics of the chemical additives and
           their potential health and environmental effects.
     (iv) Fracturing records: Operators are required to submit service company
          fracturing records and associated charts showing fracturing volumes, rates,
          and pressures.
E.   New York

     (i)   In 1992, the New York Department of Environmental Conservation
           (“NYSDEC”) finalized a Generic Environmental Impact Statement (“GEIS”)
           on the Oil, Gas and Solution Mining Regulatory Program. The NYSDEC is
           currently completing the process of supplementing its 1992 GEIS on the Oil,
           Gas and Solution Mining Regulatory Program to address issues relating to
           high-volume hydraulic fracking and horizontal drilling techniques used in
           the Marcellus Shale, the Utica Shale and other deep low permeability
           natural gas reservoirs.
     (ii) The Department imposed a de facto moratorium on permitting horizontal
          wells in the Marcellus Shale area of the State, taking the position that it
          would not issue such permits until its Supplemental Generic Environmental
          Impact Statement (“SGEIS”) was finalized. Governor Cuomo previously
          stated that he will seek to lift the moratorium on fracking and work to
          develop New York’s portion of the Marcellus Shale.
     (iii) Based on the conclusions regarding the potential adverse impact and
           benefits related to natural gas drilling operations, the draft SGEIS describes
           additional mitigation measures and protective standards the NYSDEC
           proposes to adopt in the final SGEIS and apply as conditions in typical
           drilling permits in the State.
           Among the additional requirements for gas drilling operations proposed in
           the SGEIS are:
     (iv) Required regulation of surface and groundwater withdrawals for all high
          volume hydraulic fracking activities, separate from and supplemental to the
          approvals required by the Susquehanna and Delaware River Basin
          Commissions. Specifically, the NYSDEC proposes to implement a pass-by
          flow requirement consistent with the Natural Flow Regime Method, which
          requires the suspension of water withdrawals when stream flows drop below
          30% of the Average Daily Flow (ADF) or Average Monthly Flow. This could
          require additional stream flow data collection in order to establish an
          applicable ADF or the use of conservative assumptions, which likely would
          result in suspension of water withdrawals on most streams in the State
          during the Summer and Fall seasons.
     (v) Increased mitigation measures related to surface spills and releases at the
         well pad site, including: (1) additional secondary containment requirements
         for all tanks within 500 feet of a water feature and for all stored hydraulic
         fracking additives; (2) additional requirements for on-site reserve pits such
         as volume limits and liner specifications; and (3) new requirements for the

                                                                Current as of October 2011
           onsite storage of flowback water in steel tanks subject to maximum storage
           time limits depending on the proximity of the well pad site to an aquifer or
           other water supply areas.
     (vi) Required are sampling and testing of residential water wells within 1,000
          feet of a proposed well pad or, under certain circumstances, within 2,000
          feet of a proposed well pad site; well bore integrity certification before
          commencement of hydraulic fracking operations and additional
          construction specifications for wells located in certain water supply areas;
     (vii) New requirements related to high volume hydraulic fracking, including a
           required site-specific SEQRA review for any high-volume fracking job where
           the top of the target fracture zone is (1) shallower than 2,000 feet, or (2) less
           than 1,000 feet beneath the base of an identified fresh water supply;
     (viii)Required waste tracking system for flowback and production waters. In
           addition, the draft SGEIS would prohibit road application disposal of
           flowback waters and require an approved Beneficial Use Determination by
           NYSDEC before authorizing road application disposal of produced waters;
     (ix) Required disclosure to the Department of chemical identity and formulation
          information for hydraulic fracking projects using open surface
          impoundments or in those instances where flowback will be disposed of
          through an injection well or a wastewater treatment plant located in the
          state, and a complete characterization of the flowback fluid is not available.
F.   Pennsylvania

     (i)   In Pennsylvania, legislators also proposed moratorium legislation, but the
           Pennsylvania Department of Environmental Protection’s (“PADEP’s”)
           extensive revision of its oil and gas regulations during 2010 will likely deter
           the impetus for this proposed legislation.
     (ii) Pittsburgh unilaterally declared a drilling/fracking moratorium in and
          around the municipality. Other municipalities (recently Buffalo and New
          York) have followed suit.
G.   Texas

     (i)   New legislation requiring the Texas Rail Road Commission (the “TRRC”) to
           implement regulations requiring well owners to file online forms detailing
           fracking chemicals used.
     (ii) The new law is set to become effective July 2013; but the TRRC expects to be
          ready by July 2012.
     (iii) Existing rules require companies to list just some of the chemicals on forms
           kept on the worksites. Some chemicals are exempt if the companies claim
           they are trade secrets, while others simply are not covered by the

                                                                  Current as of October 2011
     (iv) New law makes reporting mandatory for all wells. It still exempts chemicals
          deemed “trade secrets”, but the landowners or a state agency can appeal the
H.   West Virginia

     The West Virginia Department of Environmental Protection (“WVDEP”) has
     announced issuance of regulations to govern hydraulic fracturing. The
     regulations, implemented through executive order, are intended to govern
     hydraulic fracturing pending passage of permanent legislation. Among other
     things, the regulations will require that operators:
     (i)   provide WVDEP with estimates of the amount of water they will use in
           drilling and fracturing their wells;
     (ii) develop and submit to WVDEP water management plans for any wells that
          they estimate will use more than 210,000 gallons of water during any one-
          month period ;
     (iii) include in their water management plans information identifying the type of
           water source, such as surface or ground water, the specific location from
           which they anticipate withdrawing such water, the anticipated volume to be
           withdrawn, and when they anticipate withdrawing the water;
     (iv) identify all existing water uses within one mile downstream of a location
          where they will withdraw surface water, and ensure that enough in-stream
          flow remains to protect identified downstream uses;
     (v) include in their water management plans the additives they anticipate using
         in their fracturing water, and (after completion of the well) provide a listing
         of the actual additives used;
     (vi) record the quantity of flowback water, the quantity of produced water, and
          the method of management or disposal of the flowback and produced water;
     (vii) dispose of all drilling cuttings and drilling mud generated from wells that
           disturb more than three acres of surface or use more than 210,000 gallons
           of water during any one-month period at an approved solid waste facility, or
           manage such cuttings and drilling mud on-site in a manner approved by
     (viii)construct their wells in conformance with casing standards and cementing
           standards published by the American Petroleum Institute;
     (ix) develop erosion and sediment control plans for any well site that will disturb
          three or more acres of surface; and
     (x) publish a public notice at least 30 days in advance of the issuance of a
         permit to drill the first well from any particular well pad that is located
         within the boundaries of any municipality.

                                                               Current as of October 2011
I.    Wyoming

      (i)    The Wyoming Oil and Gas Conservation Commission (“WOGCC”)
             completed revisions to its regulations in June 2010 that likewise address
             hydraulic fracking. While the WOGCC’s final rule amendments included
             increased requirements such as well casing, cementing and plugging
             standards, it also included additional requirements with respect to chemical
             disclosure and added restrictions on the use of diesel and other petroleum
      (ii) The WOGCC’s revised rule went further than Colorado’s disclosure rule and
           requires operators and service companies to provide detailed information
           on fracking fluids to the state’s Oil and Gas Supervisor, both before and after
           fracking operations occur.
      (iii) The information required includes: (1) the identity of the chemical additives
            proposed to be used in fracking a well; (2) the proposed concentrations of
            those additives; and (3) the identity of the main constituent in each additive.
            In addition, the WOGCC supervisor has the discretion to request the
            complete formula of an additive in cases of need.
      (iv) The WOGCC’s rule revision also imposed an express restriction on the use of
           diesel and other petroleum distillates in usable groundwater aquifers. Under
           the revised rule, the injection of volatile organic compounds such as
           benzene, toluene, ethylbenzene and xylene (“BTEX”) or any petroleum
           distillates into useable groundwater is prohibited without prior approval
           from the oil and gas supervisor.
      (v) The WOGCC clarified that the volatile organic compounds of concern are
          those specifically related to diesel and BTEX as used in oil and gas well


Federal Legislation: Federal legislators and the EPA both recently have suggested
that federal oversight of hydraulic fracking operations is possibly warranted.

A.    Proposed FRAC Act: “Fracturing Responsibility and Awareness of
      Chemicals Act” (or “FRAC” Act).


      (i)    UIC regulation of hydraulic fracking: Proposed legislation would have
             required the EPA and the states to regulate hydraulic fracking under the
             Safe Drinking Water Act’s (“SDWA”) UIC program. The proposed legislation
             would amend the definition of “underground injection” in section 1421(d) of
             the SDWA specifically to include “the underground injection of fluids or
             propping agents pursuant to hydraulic fracing operations related to oil and

                                                                  Current as of October 2011
         gas production activities.” The SDWA currently excludes “the underground
         injection of fluids or propping agents (other than diesel fuels) pursuant to
         hydraulic fracing operations related to oil, gas, or geothermal production
         activities” from the definition of “underground injection.”
     (ii) Public disclosure of hydraulic fracking chemical constituents: The
          FRAC Act would also require the public disclosure of “the chemical
          constituents (but not the proprietary chemical formulas) used in the
          fracking process.” Proposed SDWA section 1421(b)(1)(C) would require UIC
          programs to include a requirement that “any person using hydraulic
          fracturing” disclose this information to the state or the EPA, as applicable.
          The chemical constituent information would also have to be disclosed on an
          appropriate website.
     (iii) Medical emergency disclosure of proprietary product formulas:
           The proposed legislation would also require disclosure to the EPA and
           medical personnel the complete formulas of hydraulic fracking additive
           products to in case of a “medical emergency.” The Senate version (S. 1215)
           would require the EPA to promulgate regulations accomplishing this result.
           The House version (H.R. 2766) would write the disclosure requirement
           directly into the statutory text and would apparently be effective without
           implementing regulations. Both bills would create a statutory right for the
           disclosing entity to obtain a “written statement of need” and a
           “confidentiality agreement” from the state, the EPA, or medical personnel
           after the disclosure.

B.   The Clean Energy Jobs & Oil Accountability Act 2010:

     Section 4301 of the bill would have created a new section 331 under EPCRA and
     required disclosure of chemical constituents similar to the disclosure required by
     the FRAC Act, as discussed above.

C.   Increased SEC scrutiny of shale development / hydraulic fracturing

     The Staff of the SEC’s Division of Corporation Finance recently issued comment
     letters seeking detailed disclosures of hydraulic fracturing and shale industry
     risks and many related details and has issued subpoenas to producers for proved
     reserve estimates and production from wells.
     The Staff’s very detailed comments seek disclosure of: the location of fracturing
     activities, acreage subject to fracturing activities; percentages of reserves
     associated with fracturing activities, capital expenditures associated with
     fracturing; incidents, citations or suits reflecting environmental claims or
     concerns related to fracturing, including the company’s responses and penalties
     asserted or imposed; steps taken to minimize potential environmental impact;
     the loss of hydrocarbon containment during drilling, and any consequences;
     potential liability for environmental contamination related to fracturing; and

                                                               Current as of October 2011
     supplemental reports to the Staff of representative wells, including the volumes
     and concentrations of fracturing fluid.

D.   Recent EPA Action.

     On July 28, 2011, the EPA proposed changes to existing Clean Air Act rules and
     regulations for certain emissions occurring as a result of oil and gas operations
     (volatile organic compounds, sulfur dioxide and other air toxics), and, in the
     process, targeted air pollution control and reduction at facilities relating to wells
     that are hydraulically fractured, including:
     (i)   Source performance standards for volatile organic compounds wells and
           related compressors, pneumatic controllers, condensate and crude oil
           storage tanks, and natural gas processing plants;
     (ii) Source performance standards for sulfur dioxide affecting natural gas
          processing plants; and
     (iii) Toxics standards affecting glycol dehydrators, crude oil and condensate
           storage tanks and valves at oil and natural gas production, processing,
           transmission and storage facilities.
     EPA’s Underground Injection Control (“UIC”) Program of the Safe Drinking
     Water Act (“SDWA”) sets minimum standards that states must enforce through
     their own programs. However, hydraulic fracturing was expressly excluded from
     the standard’s reach, except for the underground injection of “diesel fuels”. As a
     result, fracturing was generally unaffected by the federal standards. The EPA
     recently entered into a Memorandum of Agreement with several companies in
     the fracturing industry in which the companies agreed to abandon the practice of
     adding diesel to fracturing fluids, and the EPA Administrator followed by
     announcing in April an expected EPA “clarification” of rules affecting the use of
     diesel in fracturing. The EPA accepted written comments until June 29, 2011,
     and stated its expectation of issuing an initial draft of such rules and permitting
     standards, and setting another public comment period in the fall.
     On October 20, 2011, the EPA announced that, by the end of 2014, it will propose
     rules governing pre-treatment standards for water discharges from fracking
     operations. The EPA’s announcement noted that there currently is no
     comprehensive set of national standards for disposal of wastewater discharged
     from natural gas extraction. Wastewater from shale gas extraction cannot be
     discharged to waterways, so any that is not reused or re-injected may be
     transported to treatment plants. Over the coming months, the EPA stated it will
     begin developing a proposed standard with the input of stakeholders, such as
     industry and public health groups.

                                                                 Current as of October 2011
E.   Recent action of the Shale Gas Production Subcommittee of the
     Secretary of Energy Advisory Board (“SEAB”).

     On August 11, 2011, the Shale Gas Subcommittee of the Department of Energy’s
     SEAB released a report of its findings and recommendations for “best practices”
     in shale gas production. The subcommittee was formed earlier this year by U.S.
     Secretary of Energy, Steven Chu, and the report’s announced intention is to
     affect state and federal legislative dialogue concerning regulatory oversight of
     shale energy development.
     (i)    The subcommittee advocates the creation of a national database to connect
            resources for the transfer of information necessary to improve the public’s
            understanding of shale energy development and the industry’s production
     (ii) The subcommittee’s report discusses toxic pollutants potentially associated
          with shale production (including exploration, drilling, venting/flaring,
          equipment operation, gathering and vehicular traffic) and finds that
          knowledge of the extent, variability and scale of many shale production
          emissions is uncertain, rendering oversight and mitigation uncertain.
     (iii) The report charges the industry and its regulators with immediately
           expanding efforts to reduce emissions using “proven technologies and
           practices,” and proposes that companies be required to measure (directly,
           whenever feasible), disclose emissions (including methane, air toxics, ozone
           precursors and other pollutants), and characterize their chemical
     The report recommends (i) immediate work to establish reliable data on the life-
     cycle greenhouse gas associated with natural gas production, delivery and use, (ii)
     a one-year timetable for the assessment to be in place, and (iii) that the DOE
     Office of Science and Technology Policy coordinate an interagency effort to
     identify sources of funding and lead agency responsibility.

     Other subcommittee report findings include:

          Regulators and geophysical experts agree that the likelihood of properly
           injected fracturing fluid reaching drinking water through factures is remote
           where there is a large depth separation between drinking water sources and
           the production zone.

          If methane migration from shale gas production occurs, it is likely the result
           of loss of well integrity from poor well completion (cementing or casing) or
           poor production pressure management.

          States and localities should adopt systems for measurement and reporting of
           background water quality in advance of shale gas production activity, and
           such measurements should be publicly disclosed.

                                                                 Current as of October 2011
   Regulatory entities should immediately develop rules to require disclosure of
    all chemicals in hydraulic fracturing fluids on both public and private lands.

   Certain best practice topics identified by the subcommittee include, but are
    not limited to (1) measurement and disclosure of air emissions including
    VOCs, methane, air toxins and other pollutants, (2) reduction of methane
    emissions from all shale gas operations, (3) integrated water management
    systems, (4) well completion, casing and cementing, and (5) characterization
    and disclosure of flow back and other produced water.

The subcommittee is scheduled to provide its secondary findings and
recommendations in early 2012.

                                                          Current as of October 2011