PROPOSED RULEMAKING

ENVIRONMENTAL
QUALITY BOARD

[ 25 PA. CODE CH. 78 ]

Oil and Gas Well Fee Amendments

[43 Pa.B. 5457]
[Saturday, September 14, 2013]

 The Environmental Quality Board (Board) proposes to amend §§ 78.1 and 78.19 (relating to definitions; and permit application fee schedule) to read as set forth in Annex A. This proposed rulemaking satisfies the obligation of the Department of Environmental Protection (Department), as specified in § 78.19(f), to provide the Board with an evaluation of the Chapter 78 fees and recommend regulatory changes to address any disparity between Oil and Gas Program (Program) income generated by the fees and the Department's cost of administering the Program. The proposed rulemaking includes several changes to the structure of oil and gas well permit fees, including establishing increased flat fees for unconventional well permits.

 This proposed rulemaking was adopted by the Board at its meeting of July 16, 2013.

A. Effective Date

 This proposed rulemaking will be effective upon final-form publication in the Pennsylvania Bulletin.

B. Contact Persons

 For further information, contact Kurt Klapkowski, Director, Bureau of Oil and Gas Planning and Program Management, Rachel Carson State Office Building, 15th Floor, 400 Market Street, P. O. Box 8765, Harrisburg, PA 17105-8765, (717) 772-2199; or Trisha Salvia, Assistant Counsel, Bureau of Regulatory Counsel, P. O. Box 8464, Rachel Carson State Office Building, Harrisburg, PA 17105-8464, (717) 787-7060. Information regarding submitting comments on this proposed rulemaking appears in Section J of this preamble. Persons with a disability may use the AT&T Relay Service, (800) 654-5984 (TDD users) or (800) 654-5988 (voice users). This proposed rulemaking is available on the Department's web site at www.dep.state.pa.us (DEP Search/Keyword: Public Participation).

C. Statutory Authority

 This proposed rulemaking is authorized under 58 Pa.C.S. § 3274 (relating to regulations), which directs the Board to adopt regulations necessary to implement 58 Pa.C.S. Chapter 32 (relating to development), 58 Pa.C.S. § 3211(d) (relating to well permits), which authorizes the Board to establish permit fees that bear a reasonable relationship to the cost of administering 58 Pa.C.S. Chapter 32, and section 1920-A of The Administrative Code of 1929 (71 P. S. § 510-20), which authorizes the Board to promulgate regulations of the Department.

D. Background and Purpose

 Applicants for permits to drill oil and gas wells in this Commonwealth shall pay the permit fee established by the Board. These permits fees fund the entire operation of the Department's Office of Oil and Gas Management (Oil and Gas Program), which is responsible for Statewide oil and gas conservation and environmental programs to facilitate the safe exploration, development and recovery of Pennsylvania's oil and gas reservoirs in a manner that will protect this Commonwealth's natural resources, the environment and public health, safety and welfare. The permit fees are placed in the Well Plugging Fund.

 The Department prepared and presented to the Board a 3-Year Regulatory Fee and Program Cost Analysis Report (Report) as part of this proposed rulemaking. A copy of the Report is available from the persons listed in Section B. The conclusions of the Report are outlined in this section of the preamble.

 The Well Plugging Fund balance is declining as the Department's expenses to operate the Program have exceeded permit fee revenues for the past several fiscal years. Fiscal Year (FY) 2011-12 revenues totaled $13.5 million and expenditures exceeded $16.6 million. The Program is projected to have increasing expenditures with declining revenues in future fiscal years, which will continue to deplete the existing fund reserves. At current permit fee and expenditure levels, with projected permitting levels, the Department expects a $1.8 million deficit of the Well Plugging Fund by the end of FY 2015-16.

 In addition to declining Well Plugging Fund balances, the Program is facing increasing operational expenditures due to increased activity in the area of oil and gas exploration associated with previously unexplored unconventional gas formations, as well as the development of natural gas infrastructure throughout this Commonwealth. These expenditures are only expected to increase as exploration of other unconventional formations and infrastructure development expands.

 The proposed rulemaking increases the well permit fee to provide adequate revenue to support the ongoing operations of the Program as well as to meet future Program needs, including permitting, inspection, enforcement and information technology needs. Compounding the problem of declining funds due to increasing expenditures is the decrease of well permit applications. Since 2010, the Department has experienced a 22% decrease in the number of unconventional well permit applications received. The decline in permit applications is met with declining revenues but with the passage of the act of February 2, 2012 (P. L. 67, No. 9) and the act of February 14, 2012 (P. L. 87, No. 13), the overall responsibility of the Program has increased. It is imperative that the Department has the resources and technology necessary to ensure industry compliance and environmental protection as Office of Oil and Gas Management responsibilities in this area continue to expand.

 This increase in workload coupled with declining permit revenues creates a situation where the incoming permit revenue is insufficient to cover the current operational costs of the Program, not allowing any room for flexibility in terms of future staff and resource needs. As the oil and gas industry continues to expand in this Commonwealth, additional Department staff and technology will be critical to ensure the Department's proper oversight of the industry.

 Two areas where this increased workload and expenditures make the proposed permit fee increase critical are streamlined electronic review and staffing.

Streamlined electronic review

 The Department will allocate a substantial portion of the increased fee revenue to Information Technology projects for the Program, such as electronic permitting, mobile digital inspections, upgrades to existing reporting systems and modernization of forms and databases. This investment in technology will yield efficiencies for both the Department and the regulated community in terms of more predictable and timely permit issuance, more effective site inspections, increased availability of staff for compliance assistance, and more streamlined reporting to and communication with the Department. It will also make the Department's work more transparent to the public as electronic documents can be easily made available on the Internet. The two key initiatives on the forefront of information technology priorities for the Department are the ePermitting initiative and enabling staff with devices and the capability to conduct mobile digital inspections.

 The ePermitting system will provide the ability to process applications for oil and gas permits online. The new system will replace the manual process that requires applicants to complete paper forms and deliver multiple copies of documentation to a Department district office. This change should reduce data transcription errors from entering data on paper forms into the Department's databases. The new ePermitting system is designed to increase review efficiency through electronic workflow and to significantly decrease the time from initial application submission to permit issuance. It will enable applicants to submit online payment and provide for permit review transparency as an applicant will be able to closely follow a permit through the approval process and receive automatic notifications as it completes the outlined benchmarks. Upon approval, the system will deliver the permit electronically to the applicant, thereby eliminating the lag time from permit issuance to receipt by the applicant.

 Electronic receipt and storage of the permitting documents will also result in significant savings in terms of storage and of staff time and costs associated with related Right-to-Know requests. The Department is second in the Commonwealth in terms of Right-to-Know requests, much of which is attributed to the Program. The public will enjoy greater access to timely data as the Department receives it.

 Creation and deployment of a mobile digital inspection platform and mobile devices will create marked improvement and efficiencies in terms of how the organization conducts site inspections. Current paper based inspection forms necessitate staff spending at least 1 day a week in the office to manually enter data from paper inspection reports and mail the resulting inspection report and findings to operators. Mobile digital inspections will allow entry of data into the system while onsite, eliminate the need to return to the office for data entry and enable employees to spend their time where they are needed, on location for inspections and compliance assistance.

Staffing needs

 Currently, there are 202 full time equivalents (FTE) assigned to the Office of Oil and Gas Management. The Program has grown considerably; in 2004 the Program had 64 FTEs. Approximately 80% of the current staff is assigned to engineering, scientific or permit/inspection-related work, as oil and gas inspectors or oil and gas inspector supervisors. Another 20% are assigned to clerical, administrative or legal work to support the Program.

 The Department is proposing that additional positions are needed within the Office of Oil and Gas Management to implement the additional responsibilities required under 58 Pa.C.S. Chapter 32 to review well pad and pipeline development permit applications in an efficient and timely manner and to support the Bureau of Oil and Gas Planning and Program Management.

 Chapter 32 of 58 Pa.C.S. comprehensively amended the Oil and Gas Act of 1984 and established a number of new responsibilities on the oil and gas industry as well as the Department. Under 58 Pa.C.S. Chapter 32, the Department must inspect well sites before drilling can begin and well drillers must now notify the Department prior to cementing all strings of casing and before hydraulic fracturing operations begin. These new requirements have stretched thin the current staff and therefore necessitate additional inspectors to fulfill the increased inspection requirements and expectations of 58 Pa.C.S. Chapter 32. Absent additional inspection staff, well sites will not be inspected at the frequency envisioned by 58 Pa.C.S. Chapter 32.

 In addition to responding to new requirements, additional staff is needed to timely review the increase in permits received by the Department due to substantial natural gas infrastructure development throughout this Commonwealth. Failure to review permit applications within a reasonable time period can result in substantial cost increases for these projects and ultimately prevents natural gas from reaching consumers, thus increasing commodity costs.

 Finally, as a result of the Department's 2011 reorganization, the Office of Oil and Gas Management was created to unify the planning and program management staff with the permitting, inspection and enforcement staff under a common Deputate. As a result of this reorganization, additional staff is necessary to support the Office of Oil and Gas Management's Bureau of Oil and Gas Planning and Program Management. These additional staff will enable the Office of Oil and Gas Management to better develop new regulations, policies and technical guidance documents pertaining to well construction and surface activities on a timely basis. Failure to promptly develop these rules and policies can lead to uncertainty and inconsistent application of 58 Pa.C.S. Chapter 32. Additional staff will better serve the public as well as the industry by making more transparent how the Department interprets and implements 58 Pa.C.S. Chapter 32.

 Without additional revenue provided by a regulatory fee package, additional staff complement will not be possible, which will jeopardize the Department's ability to provide high quality compliance assistance, ensure timely permitting, ensure adequate inspection and enforcement operations, and leverage existing technology to streamline inspection and permitting activities.

 The Department consulted with the Oil and Gas Technical Advisory Board (TAB) in the development of this proposed rulemaking. The Department presented the draft proposed rulemaking to TAB at its April 23, 2013, meeting. Because the proposed rulemaking does not address technical issues relating to oil and gas, TAB did not take a formal action relative to the proposed rulemaking.

E.  Summary of Regulatory Requirements

Current fee structure

 The current permit fee structure is outlined in § 78.19 and establishes three classes of wells. Two are based on the type of wellbore that will be used to produce oil or natural gas—vertical or nonvertical (deviated or horizontal) and the third is based on the Marcellus Shale being the target formation. Permit fees for an individual well are determined by use of a sliding scale based on the total well bore length in feet. The sliding scales for the nonvertical and Marcellus wells are identical and are roughly two to three times the fee paid for a vertical well of the same total well bore length. As an example, an applicant requesting a permit for a 5,000-foot vertical well pays a fee of $550, while an applicant for a nonvertical or Marcellus Shale well of the same well bore length would pay $1,600. The current average nonvertical unconventional well permit fee is approximately $3,200 and the current average vertical unconventional well permit fee is $2,000.

Proposed fee structure

 The proposed rulemaking amends § 78.19 to create two classes of wells for permit fee purposes. These classes are ''conventional wells'' and ''unconventional wells.'' This part of the proposed rulemaking follows the general structure of 58 Pa.C.S. Chapter 32, which established the ''conventional vs. unconventional well'' distinction in a number of different areas. For example, 58 Pa.C.S. § 3215 (relating to well location restrictions) establishes differing setback requirements for the two classes of wells and 58 Pa.C.S. § 3218 (relating to protection of water supplies) establishes differing presumptions of liability for the two classes of wells.

 It is important to be clear that the proposed rulemaking does not include any changes to the current permit fee structure for applicants for permits to drill ''conventional'' oil and gas wells. Although ''conventional'' wells and formations are not defined in 58 Pa.C.S. § 3203 (relating to definitions), proposed amendments to § 78.1 would define those terms with reference to definitions in 58 Pa.C.S. § 3203 of ''unconventional well'' and ''unconventional formation.''

 By reviewing the ''unconventional'' definitions, ''conventional wells'' include: (1) any wells drilled to produce oil; (2) wells drilled to produce natural gas from formations other than shale formations; (3) wells drilled to produce natural gas from shale formations located above the base of the Elk Group or its stratigraphic equivalent; and (4) wells drilled to produce natural gas from shale formations located below the base of the Elk Group where natural gas can be produced at economic flow rates or in economic volumes without the use of vertical or nonvertical 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. For permit applicants to drill these wells, this proposed rulemaking will not have an impact.

 Permit applicants for conventional wells will not see an impact from this proposed rulemaking because the rulemaking retains the current ''vertical well'' fee structure as the new ''conventional well'' fee structure. Typically, ''conventional wells,'' as defined in this proposed rulemaking, would currently pay the ''vertical well'' fee.

 For ''unconventional nonvertical wells'' and ''unconventional vertical wells,'' the proposed rulemaking establishes flat permit fees of $5,000 and $4,200, respectively, regardless of the total well bore length of the well. The Department determined that this increase will enable the Department to operate the Program in the manner contemplated by the current rules and regulations, as well as undertake the initiatives previously described.

F.  Benefits, Costs and Compliance

Benefits

 The increased oil and gas permit fee revenue would be used to adequately fund the Department's Office of Oil and Gas Management. Revenue to the Department from the fee increase would be used solely to operate the regulatory program overseeing the responsible development of this Commonwealth's oil and natural gas resources. In addition, the Department will be able to pursue streamlined electronic review initiatives and increase the Office of Oil and Gas Management staffing levels to meet the challenges of increased responsibilities and timely oversight, responsiveness and transparency. Finally, the proposed rulemaking reduces the burden on the regulated community and the Department because it replaces the sliding scale permit fees, which require proper calculation and review, with flat fees that are easy to understand and implement.

Compliance Costs

Nonvertical unconventional wells

 The average permit fee paid for a nonvertical unconventional well or Marcellus Shale well during 2012 was approximately $3,200 per well. The proposed rulemaking establishes a fixed $5,000 fee for each nonvertical unconventional well which is an increase of $1,800 per well. The Department projects that approximately 2,600 well permit applications will be received annually following this adoption of this proposed rulemaking. This would result in an additional annual incremental permit cost of $4.68 million to the regulated community.

Vertical unconventional wells

 The proposed rulemaking establishes a fixed $4,200 fee for each vertical unconventional well. The Department projects that approximately 80 well permit applications for vertical unconventional wells will be received annually following this adoption of these proposed amendments. This would result in an additional annual incremental permit cost of $176,000 to the regulated community.

 No new legal, accounting or consulting procedures would be required.

Compliance Assistance Plan

 The Department plans to educate and assist the public and regulated community in understanding the proposed requirements and how to comply with them. This outreach initiative will be accomplished through the Department's ongoing compliance assistance program. Permit application forms and instructions would be amended to reflect the new permit fee structure.

Paperwork Requirements

 There are no additional paperwork requirements associated with this proposed rulemaking with which the industry would need to comply.

G. Pollution Prevention

 The Pollution Prevention Act of 1990 (42 U.S.C.A. §§ 13101—13109) established a National policy that promotes pollution prevention as the preferred means for achieving state environmental protection goals. The Department encourages pollution prevention, which is the reduction or elimination of pollution at its source, through the substitution of environmentally friendly materials, more efficient use of raw materials and the incorporation of energy efficiency strategies. Pollution prevention practices can provide greater environmental protection with greater efficiency because they can result in significant cost savings to facilities that permanently achieve or move beyond compliance. The anticipated increased revenues would allow the Department to continue providing adequate oversight of the oil and gas industry in this Commonwealth, ensuring continued protection of the environment and the public health and welfare of the citizens of this Commonwealth.

H. Sunset Review

 These regulations will be reviewed in accordance with the sunset review schedule published by the Department to determine whether the regulations effectively fulfill the goals for which they were intended. In addition, in accordance with § 78.19(f), the Department will evaluate these fees and recommend regulatory changes to the Board to address any disparity between the Program income generated by the fees and the Department's cost of administering the Program with the objective of ensuring fees meet all Program costs and programs are self-sustaining. This report and any proposed regulatory changes will be presented to the Board no later than 3 years after the promulgation of the final-form rulemaking.

I. Regulatory Review

 Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on September 4, 2013, the Department submitted a copy of this proposed rulemaking and a copy of a Regulatory Analysis Form to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the Senate and House Environmental Resources and Energy Committees. A copy of this material is available to the public upon request.

 Under section 5(g) of the Regulatory Review Act, IRRC may convey any comments, recommendations or objections to the proposed rulemaking within 30 days of the close of the public comment period. The comments, recommendations or objections must specify the regulatory review criteria which have not been met. The Regulatory Review Act specifies detailed procedures for review, prior to final publication of the rulemaking, by the Department, the General Assembly and the Governor of comments, recommendations or objections raised.

J. Public Comments

 Written comments. Interested persons are invited to submit comments, suggestions or objections regarding the proposed rulemaking to the Environmental Quality Board, P. O. Box 8477, Harrisburg, PA 17105-8477 (express mail: Rachel Carson State Office Building, 16th Floor, 400 Market Street, Harrisburg, PA 17101-2301). Comments submitted by facsimile will not be accepted. Comments, suggestions or objections must be received by the Board by October 15, 2013. Interested persons may also submit a summary of their comments to the Board. The summary may not exceed one page in length and must also be received by October 15, 2013. The one-page summary will be provided to each member of the Board in the agenda packet distributed prior to the meeting at which the final regulation will be considered.

 Electronic comments. Comments may be submitted electronically to the Board at RegComments@pa.gov and must also be received by the Board by October 15, 2013. A subject heading of the proposed rulemaking and a return name and address must be included in each transmission. If the sender does not receive an acknowledgement of electronic comments within 2 working days, the comments should be retransmitted to ensure receipt.

E. CHRISTOPHER ABRUZZO, 
Acting Chairperson

 Fiscal Note: 7-483. No fiscal impact; (8) recommends adoption.

Annex A

TITLE 25. ENVIRONMENTAL PROTECTION

PART I. DEPARTMENT OF ENVIRONMENTAL PROTECTION

Subpart C. PROTECTION OF NATURAL RESOURCES

ARTICLE I. LAND RESOURCES

CHAPTER 78. OIL AND GAS WELLS

Subchapter A. GENERAL PROVISIONS

§ 78.1. Definitions.

 [(a) The words and terms defined in section 103 of the act (58 P. S. § 601.103), section 2 of the Coal and Gas Resource Coordination Act (58 P. S. § 502), section 2 of the Oil and Gas Conservation Law (58 P. S. § 402), section 103 of the Solid Waste Management Act (35 P. S. § 6018.103) and section 1 of The Clean Stream Law (35 P. S. § 691.1), have the meanings set forth in those statutes when the terms are used in this chapter.

 (b)] The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise, or as otherwise provided in this chapter:

*  *  *  *  *

 Conductor pipe—A short string of large-diameter casing used to stabilize the top of the wellbore in shallow unconsolidated formations.

 Conventional formation—A formation that is not an unconventional formation.

 Conventional well—A bore hole drilled or being drilled for the purpose of or to be used for the production of oil or gas from a conventional formation.

 Deepest fresh groundwater—The deepest fresh groundwater bearing formation penetrated by the wellbore as determined from drillers logs from the well or from other wells in the area surrounding the well or from historical records of the normal surface casing seat depths in the area surrounding the well, whichever is deeper.

*  *  *  *  *

 L.E.L.—Lower explosive limit.

 [Marcellus Shale well—A well that when drilled or altered produces gas or is anticipated to produce gas from the Marcellus Shale geologic formation.]

 Noncementing material—A mixture of very fine to coarse grained nonbonding materials, including unwashed crushed rock, drill cuttings, earthen mud or other equivalent material approved by the Department.

*  *  *  *  *

 Nonvertical unconventional well—

 (i) [A] An unconventional well drilled intentionally to deviate from a vertical axis.

 (ii) The term includes wells drilled diagonally and wells that have [horizonal] horizontal bore holes.

*  *  *  *  *

 Vertical unconventional well—[A] An unconventional well with a single vertical well bore.

*  *  *  *  *

Subchapter B. PERMITS, TRANSFERS AND OBJECTIONS

PERMITS AND TRANSFERS

§ 78.19. Permit application fee schedule.

 (a) An applicant for a conventional well shall pay a permit application fee according to the following schedule:

[Vertical] Conventional Wells		[Nonvertical Wells]		[Marcellus Shale Wells]
Total Well Bore Length in Feet	Total Fee	[Total Well Bore Length in Feet	Total Fee]	[Total Well Bore Length in Feet	Total Fee]
0 to 2,000	$250	[0 to 1,500	$900]	[0 to 1,500	$900]
2,001 to 2,500	$300	[1,501 to 2,000	$1,000]	[1,501 to 2,000	$1,000]
2,501 to 3,000	$350	[2,001 to 2,500	$1,100]	[2,001 to 2,500	$1,100]
3,001 to 3,500	$400	[2,501 to 3,000	$1,200]	[2,501 to 3,000	$1,200]
3,501 to 4,000	$450	[3,001 to 3,500	$1,300]	[3,001 to 3,500	$1,300]
4,001 to 4,500	$500	[3,501 to 4,000	$1,400]	[3,501 to 4,000	$1,400]
4,501 to 5,000	$550	[4,001 to 4,500	$1,500]	[4,001 to 4,500	$1,500]
5,001 to 5,500	$650	[4,501 to 5,000	$1,600]	[4,501 to 5,000	$1,600]
5,501 to 6,000	$750	[5,001 to 5,500	$1,700]	[5,001 to 5,500	$1,700]
6,001 to 6,500	$850	[5,501 to 6,000	$1,800]	[5,501 to 6,000	$1,800]
6,501 to 7,000	$950	[6,001 to 6,500	$1,900]	[6,001 to 6,500	$1,900]
7,001 to 7,500	$1,050	[6,501 to 7,000	$2,000]	[6,501 to 7,000	$2,000]
7,501 to 8,000	$1,150	[7,001 to 7,500	$2,100]	[7,001 to 7,500	$2,100]
8,001 to 8,500	$1,250	[7,501 to 8,000	$2,200]	[7,501 to 8,000	$2,200]
8,501 to 9,000	$1,350	[8,001 to 8,500	$2,300]	[8,001 to 8,500	$2,300]
9,001 to 9,500	$1,450	[8,501 to 9,000	$2,400]	[8,501 to 9,000	$2,400]
9,501 to 10,000	$1,550	[9,001 to 9,500	$2,500]	[9,001 to 9,500	$2,500]
10,001 to 10,500	$1,650	[9,501 to 10,000	$2,600]	[9,501 to 10,000	$2,600]
10,501 to 11,000	$1,750	[10,001 to 10,500	$2,700]	[10,001 to 10,500	$2,700]
11,001 to 11,500	$1,850	[10,501 to 11,000	$2,800]	[10,501 to 11,000	$2,800]
11,501 to 12,000	$1,950	[11,001 to 11,500	$2,900]	[11,001 to 11,500	$2,900]
		[11,501 to 12,000	$3,000]	[11,501 to 12,000	$3,000]

 (b) An applicant for a [vertical] conventional well exceeding 12,000 feet in total well bore length shall pay a permit application fee of $1,950 + $100 for every 500 feet the well bore extends over 12,000 feet. Fees shall be rounded to the nearest 500-foot interval under this subsection.

 (c) An applicant for [a nonvertical well or Marcellus Shale well exceeding 12,000 feet in total well bore length] an unconventional well shall pay a permit application fee [of $3,000 + $100 for every 500 feet the well bore extends over 12,000 feet. Fees shall be rounded to the nearest 500-foot interval.] according to the following:

 (1) $4,200 for a vertical unconventional well.

 (2) $5,000 for a nonvertical unconventional well.

 (d) If, when drilled, the total well bore length of the conventional well exceeds the length specified in the permit application due to target formation being deeper than anticipated at the time of application submittal, the operator shall pay the difference between the amount paid as part of the permit application and the amount required by subsections [(a)—(c)] (a) and (b).

 (e) An applicant for a [vertical] conventional well with a well bore length of 1,500 feet or less for home use shall pay a permit application fee of $200.

*  *  *  *  *

[Pa.B. Doc. No. 13-1666. Filed for public inspection September 13, 2013, 9:00 a.m.]

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