What is Marcellus Shale?
Marcellus Shale is a type of sedimentary rock found throughout eastern North America. Named for Marcellus, NY, where there is a significant amount of the shale, it can be found throughout the Appalachian Basin. U.S. locations of Marcellus Shale include the Southern Tier and Finger Lakes regions of New York, northern and western Pennsylvania, eastern Ohio, western Maryland and most of West Virginia.
Marcellus Shale is believed to be at least 384 million years’ old. It’s compositional thickness ranges from 890 feet, in New Jersey, to 40 feet in Canada. The Shale is typically found deposited on the limestone of the Onondaga Formation, a group of hard limestone and dolostone, featured prominently throughout New York and Ontario.
Trapped between the Onondaga Formation, located below the Marcellus Shale, and the Tully Limestone located above it, are valuable natural gas reserves. The gas is produced by thermogenic decomposition of organic materials in the sediments under the high temperature and pressure generated after the formation was buried deep below the surface of the earth. The rock holds most of the gas in the pore spaces of the shale, with vertical fractures or joints providing additional storage, as well as pathways for the gas to flow; gas is also adsorbed on mineral grains, and the carbon in the shale.
How Much Natural Gas is in the Marcellus Shale?
Estimates vary, but it is believed that the Marcellus Shale holds anywhere from 262 trillion to 1,307 trillion cubic feet of recoverable natural gas. Some scholars believe that with current technology, about 49 trillion cubic feet of natural gas are recoverable, which would be worth approximately 1 trillion dollars.
Why all the Interest in the Marcellus Shale now?
Although geologists have long known about the natural gas resources of the Marcellus Shale formation, the depth and tightness of the shale made gas exploration and extraction very difficult and expensive. Interest has increased significantly of late due to:
- recent enhancements to gas well development technology, specifically horizontal drilling and hydraulic fracturing,
- the proximity of high natural gas demand markets in New York, New Jersey and New England, and
- the construction of the Millennium Pipeline through the Southern Tier of New York.
What are Horizontal Drilling and Hydraulic Fracturing?
Hydraulic fracturing consists of pumping a fluid and a propping material such as sand down the well under high pressure to create fractures in the gas-bearing rock. The propping material (usually referred to as a “proppant”) holds the fractures open, allowing more gas to flow into the well than would naturally. No blast or explosion is created by the hydraulic fracturing process, which has been used in New York since at least the 1950s. Hydraulic fracturing technology is especially helpful for “tight” rocks like shale.
Large volumes of water are required for hydraulic fracturing in order to fracture the rocks and produce the desired amount of gas. Each well may use more than one million gallons of water.
The hydraulic fracturing fluid typically contains compounds added to the water to make the hydraulic fracturing process more effective. These may include a friction reducer, a biocide to prevent the growth of bacteria that would damage the well piping or clog the fractures, a gel to carry the proppant into the fractures, and various other agents to make sure the proppant stays in the fractures and to prevent corrosion of the pipes in the well.
Environmental concerns around the drilling and extraction processes have sparked opposition to development of this resource. One concern is the release to the environment of underground naturally occurring radioactive material through the drilling fluids and equipment. The hydraulic fracturing process also uses large quantities of surface water.
A large portion of the formation underlies the environmentally sensitive Chesapeake Bay Watershed as well as the Delaware River Basin.
Orders were issued by the Pennsylvania Department of Environmental Protection to suspend operations at several wells in May 2008, because surface water was being diverted by drillers who lacked the necessary permits, and precautions to protect streams from contaminated runoff were questioned. The documentary Gasland presents a good overview of the issues faced by our neighbors.
Claims of Our Clients
Our Pennsylvania clients have traditional water contamination claims.
Violation of Pennsylvania Hazardous Sites Cleanup Act (HSCA) 35 P.S. section 6020.101 et seq. Sections 507, 702, 1101 provide for strict liability for costs
- Strict liability for abnormally dangerous and ultra hazardous activity
- Breach of contract
- Fraudulent misrepresentation
- Medical monitoring trust funds
These traditional toxic tort claims are well and good, and are emotionally compelling.
Our New York clients as yet have no claims for water contamination as there is a moratorium in place to prevent drilling until further study.
Transactional Claims Involving the Leases
We believe that there are thousands of clients whose leases fail to comport with Pennsylvania law and are void.
If we are correct, this will require a renegotiation of thousands of leases, involving huge areas of land that the companies will have to re-lease at great expense.
What is the Pennsylvania Guaranteed Minimum Royalty Act (“GMRA”), 58 P.S. § 33?
The Guaranteed Minimum Royalty Act (“GMRA”), 58 P.S. § 33 governs leases between Pennsylvania landowners and gas companies seeking to drill natural gas wells into Pennsylvania’s Marcellus Shale deposits.
The GMRA requires that leases guarantee the landowner-lessor “at least one-eighth royalty of all oil, natural gas or gas of other designations removed or recovered from the subject real property.” 58 P.S. § 33.
The statute mandates are as follows:
A lease or other such agreement conveying the right to remove or recover oil, natural gas or gas of any other designation from the lessor to lessee, shall not be valid if such lease does not guarantee the lessor at least one-eight royalty of all loyal natural gas or gas of other designations removed or recovered from the subject real property.
The GMRA creates an affirmative drafting standard that must be met by the language of the lease itself. Specifically, in order to be valid language of the lease itself must guarantee that the lessor receives a 1/8 royalty.
Thousands of leases in the Commonwealth of Pennsylvania fail to guarantee the lessor a royalty equal to 1/8 of the wellhead value of gas, because the lease fails to limit the post production cost deductions to 1/8 of the post production costs (or, in other words in the lessor’s pro rata share of those costs). Thousands of leases state that all post production costs will be deducted.
Thousands of leases also fail to identify what costs will be considered post production costs. These leases fail to specify or identify the types of deductions to be made, and fail to provide that the lessor’s percentage share of the post production cost deductions will be the same as the lessors royalty percentage. As a result, we believe that these leases are void. The remedy provided by the GMRA is not reformation, but specifically, the lease itself “shall not be valid.”
Many, many, landowners in the area entered into leases which do not provide for a minimal royalty and were paid much less than that paid per acre now and the royalties now being offered.
We are also investigating the applicability of the Pennsylvania consumer fraud statute. We believe that many landman peddlers, acting as agents of not only the land acquisition companies but of the oil and gas companies, fraudulently induced land owners to sign leases and failed to warn of the dangers of gas extraction and exploration.
Pennsylvania consumer fraud statutes require a right to rescind within 72 hours.
We also handle claims of both New York and Pennsylvania residents who are not receiving the agreed royalties. The practice of forced integration whereby the oil and gas companies force people to lease their lands is also part of our practice along with lease avoidance and royalty fraud.