Oil & Gas Alert
September 2008
Authors:
John F. Spinello
1
Partner
+1.973.848.4061
john.spinello@klgates.com
B. David Naidu1
Of Counsel
+1.212.536.4864
david.naidu@klgates.com
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Significant Developments in Oil and Gas
Drilling in New York State
By John Spinello and David Naidu1, K&L Gates
The summer of 2008 witnessed significant developments on the legislative and regulatory
fronts regarding oil and gas drilling in New York State, particularly with respect to
horizontal wells in the Marcellus Shale formation. The legislative efforts focused on
amending spacing requirements because the existing statute had not addressed horizontal
drilling. Ongoing regulatory efforts aim at developing permitting requirements that will
be applicable to horizontal drilling. These regulatory efforts are in their infancy and will
continue to evolve for the rest of 2008 and into 2009. This article will address both of
these fronts, and where they may be headed.
Legislative Developments - Changes in the Spacing Requirements
for Horizontal Drilling
The Oil, Gas and Solution Mining Law, contained in Article 23 of the New York
Environmental Conservation Law (the “Act”), provides for the regulation of oil and gas
wells in New York State. One provision of the law governs how wells are spaced to ensure
efficient and economic recovery of oil and gas resources while protecting the correlative
rights of mineral resource owners (i.e., usually ownership rights of the surface owners).
The Act establishes standard, statewide spacing for wells, which varies according to the
target geologic formation and depth, and provides flexibility for spacing units of plus or
minus ten percent to account for site-specific circumstances that may require movement
of surface location. The Act also establishes setback distances for spacing units to help
ensure that wells do not drain oil and gas from under adjacent spacing units. In 2005, the
Legislature amended the Act (Chapter 386 of the Laws of 2005) revising the statewide
spacing provisions for conventional vertical gas wells, but did not address oil wells or
horizontal wells. The 2005 amendments also did not make any provision for adjusting the
required 660-foot setback by the authorized 10 percent tolerance, when a spacing unit is
smaller than 40 acres.
In 2008, the New York State Department of Environmental Conservation (“NYSDEC”)
recognized that horizontal wells are being used increasingly in New York. Horizontal wells
are drilled vertically to a point above the target formation, then drilled at an angle to reach
the target formation and subsequently drilled horizontally across the formation to provide
more efficient recovery of the resource. NYSDEC projects a significant increase in the
number of horizontal wells to be proposed, especially to target shale formations. However,
horizontal wells are not contemplated by the existing statute. The vast majority of proposals
expected for oil wells and horizontal wells would not conform to current statewide spacing
sizes, and would therefore require notice, public comment and possibly a hearing for each
proposed well. With hundreds of such wells likely to be proposed in the near future, the
potential burden on NYSDEC and the oil and gas industry would have been substantial,
with no commensurate benefit in ensuring that the Act’s policy objectives are met.
1 J ohn Spinello is a partner in the Newark office of K&L Gates where his practice focuses on regulatory
counseling, advocacy and environmental litigation for clients in the energy industry. David Naidu is of counsel
in the New York office of K&L Gates where his practice focuses on transactional, litigation and regulatory
environmental compliance issues in the energy industry.
Oil & Gas Alert
NYSDEC concluded that horizontal drilling requires
expanded unit sizes to accommodate the length of
the wellbore, and requested that the Legislature again
amend the Act.
Responding to NYSDEC’s request, Senator Catharine
M. Young (Republican, 57 th District, Chautauqua,
Allegany and Cattaraugus Counties), a member of the
Senate Environment Committee, introduced Senate
Bill No. 8169 on May 7, 2008. Assemblyman William
Parment (Democrat, 150 th District, Chautauqua
County), a member of the Assembly Environment
Committee, introduced a companion bill. As further
discussed below, the Legislature passed the bill, and
Governor Paterson signed the amendments into law on
July 21, 2008, as reflected in Chapter 376 of the Laws
of 2008. The amendments expand the definition of
statewide spacing to:
(1) address oil wells and horizontal wells;
(2) provide a 330-foot setback for horizontal
shale wells; and
(3) decrease the setback from 660 feet to 460
feet for vertical shale wells and smaller units in
other pools.
In addition, the amendments created three categories
of shale unit development:
(1) vertical wells (40 acres with 460-foot
setbacks);
(2) single-well horizontal units (40 acres plus
acreage necessary to maintain a 330-foot
setback); and
(3) multiple-well horizontal units (up to 640
acres with 330-foot setbacks, allowing operators
with smaller acreage positions to develop
smaller units).
The provision for multiple-well shale units is intended
to allow operators to drill several wells from a
centralized location, reducing the extent of surface
environmental disturbance. Under the amendments,
infill drilling necessary to fully develop the acreage is
required in multiple-well units, and the failure to drill
infill wells would constitute good cause for NYSDEC
to initiate a unit modification.
The geological characteristics of shale are such that
distinct lateral pools and spacing units separated
by excluded acreage are not likely. Nevertheless,
NYSDEC staff will continue to review every unit
proposed to conform to statewide spacing to ensure
that it is uniformly shaped with other units in the pool
or field and abuts other units in the same pool unless
sufficient distance remains for another uniformly
shaped unit to be formed. This prevents well operators
from leaving “stranded” undrillable acreage between
units in a common pool or from configuring units based
on lease position. Proposals which do not meet these
criteria, but which NYSDEC staff determine may meet
the policy objectives of the statute, are subject to the
public review process set forth in the Act. This ensures
that affected owners are aware that a non-abutting or
non-uniformly shaped unit has been proposed and have
the opportunity to be heard.
The stated unit sizes will only be expanded if the length
of the proposed horizontal wellbore is such that the
minimum required setback cannot be met within the
specified number of acres. At the time of permitting
when the spacing unit is set, only the acreage necessary
and sufficient to maintain minimum setbacks for the
entire wellbore length in the target formation and at
both ends of the wellbore in the target formation will
be allowed. Thus, the amendments are expected to
ensure that both the single-well and multiple-well
horizontal units are regularly shaped and will not create
“islands” of undrillable acreage.
By accommodating smaller oil field spacing and the
length of horizontal wellbores, but requiring protective
setbacks, and when appropriate, the drilling of infill
wells, the amendments further the policy objectives of
preventing waste of the State’s oil and gas resources
and development of oil and gas properties in a manner
that results in a greater ultimate recovery, while
protecting the rights of mineral rights owners and the
general public.
When Governor Paterson signed the amendments
into law, he observed that statutory changes would
increase the efficiency and predictability of well
spacing, reduce administrative costs, better protect the
rights of landowners who may be affected by drilling
operations, and reduce unnecessary disturbance of the
natural landscape. Further, Paterson stated, “Additional
drilling in New York State has the potential for an
increase in domestic natural gas production and to
help in our effort to reduce our dependence on foreign
oil. It can also stimulate economic investment in New
York, particularly in the southern tier, through direct
September 2008 | 2
Oil & Gas Alert
and indirect spending, increased state and local tax
revenues, landowner compensation and job creation.”
However, the Governor also publicly recognized the
concerns expressed by some constituencies regarding
potential adverse environmental impacts that may be
precipitated by significantly increased well drilling,
“such as potential impacts on groundwater resources,
procedures for the treatment and transport of process
water contaminated during drilling operations, potential
impacts on local infrastructure from increased heavy
truck traffic, the safety of fluids used in the hydraulic
fracturing of geologic formations and potential
cumulative impacts of wide-scale drilling across the
southern tier.” To address these concerns, Governor
Paterson underscored that all existing environmental
review and permitting requirements remain unchanged.
In addition, the Governor said he would direct NYSDEC
to initiate a formal public process to update the State
Environmental Quality Review Act (“SEQRA”)
Generic Environmental Impact Statement (“GEIS”)
applicable to horizontal gas drilling in the Marcellus
Shale in order to “ensure that it is suitable to address
potential new environmental impacts from drilling.”
The NYSDEC announced details for reexamining the
1992 GEIS, described below, four days later.
Regulatory Developments –
Revised Generic Environmental Impact
Statement
Prior to issuing a permit, NYSDEC must determine
whether the proposed activities satisfy the requirements
of the State Environmental Quality Review Act, 6
NYCRR Part 617. The purpose of SEQRA is to
ensure, prior to permitting or funding a project, the
appropriate local, state or regional agency considers
the project’s environmental impacts and, if there are
adverse environmental impacts, whether such impacts
can be mitigated.
An applicant for a permit that is subject to SEQRA (i.e.,
such as a permit for drilling) commences the SEQRA
process by submitting an Environmental Assessment
Form, outlining the anticipated environmental impacts
of the project. This form is reviewed by NYSDEC to
determine if the proposed activity will have a significant
impact on the environment. If NYSDEC determines
the activity will not have a significant impact, it issues
a “Negative Declaration,” which concludes the SEQRA
process and allows the NYSDEC to consider a permit
application for the activity.
If the NYSDEC determines the project will have a
significant environmental impact, the permit applicant
must prepare and submit an Environmental Impact
Statement (“EIS”), and this document is subject to
public notice and comment. An EIS is a detailed
site-specific document that discusses the proposed
activity, significant social, economic and other benefits,
and adverse environmental impacts of the proposed
activity, the mitigation measures that are proposed to
lessen the adverse impacts, the alternatives considered
that would minimize or avoid adverse impacts, and
the issues of controversy. Once an EIS is completed,
it is submitted to the agency. If the agency determines
that it is adequate and complete, then this draft EIS
is published for public notice and comment. After
receiving comments, the agency may decide to hold
a hearing on the draft EIS or alternatively, require
the applicant to address the substantive issues raised
during the public comment period. Once the final
EIS is submitted to the agency (i.e., the EIS that has
incorporated or responded to all comments), the agency
will either make a positive or negative determination
on the activity (or in some circumstances ask for
additional information).
In 1992, NYSDEC prepared and formally issued a
Final Generic Environmental Impact Statement
(“FGEIS”) for oil and gas drilling activities. A GEIS
allows a permit applicant to avoid preparing and filing
a site-specific EIS if the proposed activity falls within
the coverage of projects described in the FGEIS. Until
recently, an applicant for an oil and gas drilling permit
could have relied upon the 1992 FGEIS. However, as
noted above, responding to the Governor’s directive,
on July 25, 2008, NYSDEC announced its plans to
revise and supplement the 1992 FGEIS. NYSDEC
indicated that until it issues a new FGEIS for oil and
gas drilling, a permit applicant seeking to engage in
horizontal drilling in the Marcellus Shale may not rely
on the 1992 FGEIS, but rather must prepare and submit
a site-specific EIS.
According to NYSDEC, the Supplemental GEIS
will specifically address the environmental impacts
associated with horizontal drilling in the Marcellus
Shale, including water consumption and water
quality impacts. The reexamination will begin with
NYSDEC’s issuance of a draft scoping document,
which is anticipated at the end of the summer, outlining
issues that will be reviewed in the revised GEIS.
NYSDEC indicates it will include a discussion of the
September 2008 | 3
Oil & Gas Alert
large volumes of water that are typically needed to
hydraulically fracture the shale, the additives used to
facilitate the fracture, and the recovery, handling and
disposal of water during and after drilling concludes.
Once this draft scoping document is issued, NYSDEC
will solicit public comments and conduct public
meetings. This will provide an opportunity for
interested parties to raise issues and to suggest how
the Supplemental GEIS should be drafted. Presently,
NYSDEC anticipates issuing a draft Supplemental
GEIS in early spring 2009, which will also be open to
public comment before being finalized later in 2009.
In conclusion, while the spacing issue seems to have
been addressed through statutory amendments, the
debate over the Supplemental GEIS and the impact
of horizontal drilling is just beginning. As industry
and other advocacy groups, state and local officials,
residents and landowners weigh into the process, it
is likely that a wide range of issues may be placed on
the table. It will be essential for those in the regulated
community who have invested in developing Marcellus
Shale resources to remain actively involved throughout
the Supplemental GEIS process.
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