6TH LAW OF SHALE PLAYS CONFERENCE September 10-11, 2015| Omni William Penn Hotel Pittsburgh, Pennsylvania

TABLE OF CONTENTS Late material will be posted online after the conference. An email notice will be sent to all registrants.

TAB

FACULTY ROSTER 1 CONFERENCE CO-CHAIRS 2 Sharon O. Flanery, Steptoe & Johnson PLLC Erin W. McDowell, Range Resources – Appalachia, LLC

THE OUTLOOK FOR ENERGY: AVIEW TO 2040 3 E. Nicholas (Nick) Jones, Energy Advisor – Corporate Strategic Planning, Exxon Mobil Corporation PRIVATE AND PUBLIC CAPITAL RAISES AND EXIT TRANSACTIONS IN 4 TODAY’S SHALE PLAYS Greg Matlock, EY Stephen T. Olson, Jones Day

LITIGATION UPDATE –HOT TOPICS AND FUTURE DISPUTES 5 Kevin L. Colosimo, Burleson LLP Donald D. Jackson, Haynes and Boone, LLP Timothy M. Miller, Babst Calland R. Jeffrey Pollock, McDonalds Hopkins LLC Paul K. Stockman, McGuireWoods LLP

HOSTED LUNCHEON PRESENTATION 6 ENERGY PRODUCTION 2015-2020 – WHAT DO THE NEXT FIVE YEARS HOLD? Dave Freudenthal Former Governor of Wyoming Crowell & Moring LLP Sponsored by BAKER BOTTS L.L.P. BURLESON LLP GARDERE WYNNE SEWELL LLP HAYNES &BOONE, LLP LIQUID LITIGATION MANAGEMENT,INC. MENDENHALL LAW OFFICES NORTON ROSE FULBRIGHT LLP TABLE OF CONTENTS TAB

MIDSTREAM AND MARKETING CHALLENGES IN A REDUCED PRICE 7 ENVIRONMENT Matt Curry, Range Resources Corporation

FERC AND MIDSTREAM UPDATE 8 Kurt L. Krieger, Steptoe & Johnson PLLC

RECENT DEVELOPMENTS IN ROYALTY LITIGATION IN THE SHALE 9 PLAYS Kevin C. Abbott, Reed Smith LLP Nicolle R. Snyder Bagnell, Reed Smith LLP

SEISMIC ACTIVITY AND UNCONVENTIONAL OIL AND GAS ACTIVITY 10 Barclay Nicholson, Norton Rose Fulbright LLP

NETWORKING RECEPTION Sponsored by

BABST CALLAND

K&L GATES LLP

NAVIGANT CONSULTING,INC.

RIMKUS CONSULTING GROUP,INC.

VINSON &ELKINS LLP

GENERAL COUNSEL PANEL 11 Erin W. McDowell, Range Resources – Appalachia, LLC C. Corwin Bromley, MarkWest Energy Partners, L.P. Larry D. Cannon, FTS International David P. Poole, Range Resources Corporation Steven D. Seibert, The Williams Companies, Inc.

SHALE PAY: MANAGING THE INCREASED RISK OF WAGE ISSUES IN 12 THE SHALE PLAYS Rachel Powitzky Steely, Gardere Wynne Sewell LLP TABLE OF CONTENTS TAB

SOMETHING IN THE AIR –FEDERAL ENVIRONMENTAL REGULATION & 13 ITS IMPACT ON UPSTREAM AND MIDSTREAM OPERATIONS Kirsten L. Nathanson, Crowell & Moring LLP

ENVIRONMENTAL ISSUES IN THE SHALE PLAYS 14 Kathy G. Beckett, Steptoe & Johnson PLLC Margaret Anne Hill, Blank Rome LLP Larry W. Nettles, Vinson & Elkins LLP Kristin L. Watt, Vorys, Sater, Seymour and Pease LLP R. Timothy Weston, K&L Gates LLP

SPONSORED NETWORKING LUNCHEON

SPONSORED BY EY STEPTOE &JOHNSON PLLC XTO ENERGY INC.

THE ETHICS OF DOWNSIZING: ALAWYER’S PROFESSIONAL 15 OBLIGATIONS IN A REDUCTION-IN-FORCE Mark A. Konkel, Kelley Drye & Warren LLP 6TH LAW OF SHALE PLAYS CONFERENCE September 10-11, 2015 Omni William Penn Hotel | Pittsburgh, PA

Presented by Institute for Energy Law and Energy and Mineral Law Foundation

FACULTY ROSTER

CONFERENCE CO-CHAIRS

Sharon O. Flanery Erin W. McDowell Steptoe & Johnson PLLC Range Resources – Appalachia, LLC 707 Virginia St. E., 8th Fl. 380 Southpoint Blvd., Suite 300 Charleston, WV 25301 Canonsburg, PA Phone: (304) 353-8155 Phone: (714) 754-5352 Email: [email protected] Email: [email protected]

SPEAKERS

Kevin C. Abbott Nicolle R. Snyder Bagnell Reed Smith LLP Reed Smith LLP 225 Fifth Ave., Reed Smith Centre 225 Fifth Ave., Reed Smith Centre Pittsburgh, PA 15222 Pittsburgh, PA 15222 Phone : (412) 288-3804 Phone: (412) 288-7112 Email : [email protected] Email: [email protected]

Kathy G. Beckett C. Corwin Bromley Steptoe & Johnson PLLC MarkWest Energy Partners, L.P. 707 Virginia St. E., 8th Fl. 1515 Arapahoe Street, Tower 1, Suite 1600 Charleston, WV 25301 Denver, CO 80202 Phone: (304) 353-8172 Phone: (303) 925-9200 Email: [email protected] Email: [email protected]

Larry D. Cannon Kevin L. Colosimo FTS International Burleson LLP 777 Main Street, Suite 3000 1900 Main Street, Suite 201 Fort Worth, TX 76102 Canonsburg, PA 15317 Phone: (817) 339-3637 Phone: (724) 743-3443 Email: [email protected] Email: [email protected] Matt Curry Dave Freudenthal Director of Business Development Crowell & Moring LLP Range Resources Corporation 1604 Pioneer Ave. 3000 Town Center Blvd Cheyenne, WY 82001 Canonsburg, PA 15317 Phone: (307) 996-1401 Phone: (724) 743-6700 Email: [email protected]

Margaret Anne Hill Donald D. Jackson Blank Rome LLP Haynes & Boone, LLP One Logan Square, 130 North 18th Street 1221 McKinney St., Suite 2100 Philadelphia, PA 19103 Houston, TX 77010 Phone: (215) 569-5331 Phone: (713) 547-2026 Email: [email protected] Email: [email protected]

E. Nicholas (Nick) Jones Mark A. Konkel Exxon Mobil Corporation Kelley Drye & Warren LLP 5959 Las Colinas Boulevard 101 Park Avenue Irving, TX 75039 New York, NY 10178 Phone: (972) 444-1000 Phone: (212) 808-7959 Email: [email protected]

Kurt L. Krieger Greg Matlock Steptoe & Johnson PLLC EY 707 Virginia St. E., 8th Fl. 1401 McKinney St., Suite 1200 Charleston, WV 25301 Houston, TX 77010 Phone: (304) 353-8124 Phone: (713) 750-8133 Email: [email protected] Email: [email protected]

Timothy M. Miller Kirsten L. Nathanson Babst Calland Crowell & Moring LLP 3000 Summers Street, Suite 1000 1001 Pennsylvania Ave. NW Charleston, WV 25301 Washington, DC 20004 Phone: (681) 265-1361 Phone: (202) 624-2887 Email: [email protected] Email: [email protected] Larry W. Nettles Barclay Nicholson Vinson & Elkins LLP Norton Rose Fulbright US LLP 1001 Fannin St., Suite 2500 1301 McKinney, Suite 5100 Houston, TX 77002 Houston, TX 77010 Phone: (713) 758-4586 Phone: (713) 651-3662 Email: [email protected] Email: [email protected]

Stephen T. Olson R. Jeffrey Pollock Jones Day McDonald Hopkins LLC 717 Texas, Suite 3300 600 Superior Avenue, East, Suite 2100 Houston, TX 77002 Cleveland, OH 44114 Phone : (832) 239-3744 Phone: (216) 348-5715 [email protected] Email: [email protected]

David P. Poole Steven D. Seibert Range Resources Corporation The Williams Companies, Inc. 100 Throckmorton Street, Suite 1200 2000 Commerce Drive Fort Worth, TX 76102 Pittsburgh, PA 15275 Phone: (817) 869-4254 Phone: (412) 787-3941 Email: [email protected] Email: [email protected]

Rachel Powitzky Steely Paul K. Stockman Gardere Wynne Sewell LLP McGuireWoods LLP 1000 Louisiana, Suite 3400 625 Liberty Avenue, Suite 2300 Houston, TX 77002 Pittsburgh, PA 15222 Phone: (713) 276-5605 Phone: (412) 667-7945 Email: [email protected] Email: [email protected]

Kristin L. Watt R. Timothy Weston Vorys, Sater, Seymour and Pease LLP K&L Gates LLP 52 East Gay Street 17 North Second Street, 18th Floor Columbus, OH 43215 Harrisburg, PA 17101 Phone: (614) 464-8398 Phone: (717) 231-4504 Email: [email protected] Email: [email protected] Sharon O. Flanery | Member

Phone: (304) 353-8155 [email protected] Licensure: OH | PA | WV J.D. Duquesne University

Sharon Flanery concentrates her practice in the areas of energy and natural resources law and Chairs the firm's Energy & Natural Resources Department. As a petroleum engineer with both an operating and a legal background in the industry, she brings real-world experience to her practice. This experience includes acquisitions and divestitures, mineral leases, joint ventures, contract mining agreements, joint operating agreements, and sales and marketing agreements, as well as gathering, transportation, and processing agreements. In addition, she has substantial experience in land and legal due diligence associated with mineral transactions, as well as in the legislative and regulatory arenas. Her general property background includes leases, rights of way, deeds, land use, and damage issues. Flanery is also a member of the advisory board of the WVU College of Law Center for Energy and Sustainable Development. REPRESENTATIVE EXPERIENCE

Led teams responsible for numerous asset and stock transactions, lease transactions, and land and legal due diligence for acquisitions as lead or local counsel, involving over 4,000,000 gross acres

Led team drafting a multi-million dollar supply agreement for the production and sale of biomass to an electric generating plant. The project involved traditional contract issues, clean air and greenhouse gas regulations, potential tax credits and subsidies for renewable energy sources, corporate tax, and intellectual property.

Drafted legislation on behalf of a Fortune 500 energy client that clarified the requirements for notification of landowners in connection with coalbed methane development situations and prepared implementation guidelines and procedures for the client to use under the new legislation WORK EXPERIENCE

2004 Steptoe & Johnson PLLC, Charleston, WV

2001-2003 Vice President, Exploration, Columbia Natural Resources, Charleston, WV

1998-2001 AGC, Columbia Gas Transmission Corp., NiSource Corporate Services Company, Charleston, WV

1993-1998 Legal Department, CONSOL Energy, Pittsburgh, PA

1991-1993 Attorney, Thorp, Reed & Armstrong, Pittsburgh, PA

1987-1990 Reservoir & Production Engineering Supervisor, CNG Development, Pittsburgh, PA

1983-1985 Reservoir Engineer, Aramco, Saudi Arabia

1978-1982 Special Projects Engineer, Columbia Gas Transmission, Charleston, WV RECENT PUBLICATIONS / SPEAKING ENGAGEMENTS Overview of Pooling and Unitization Affecting Appalachian Shale Development Part I: Pooling Statutes in NY, MD, OH, PA & WV Part II: Pooling Statutes in NY, MD, OH, PA & WV Sharon O. Flanery | Member

Pittsburgh Bans Gas Drilling TETCO Pipeline Restrictions Effective April 1 WVU Report Details Marcellus Shale Economic Impact Zoning Ordinances, the Marcellus Opportunity, and Regional Developments “When Worlds Collide: Results of the Rise of Private Equity as the Funding Source of Choice for American Oil and Gas Developers” Guest Speaker, All-female Summer Camp, Benjamin M. Statler College of Engineering and Mineral Resources, West Virginia University, July 2014 "Overview of Pooling Affecting Appalachian Shale Development," EMLF Annual Institute, May 2011 Co-author, "Recent Legal Developments in Carbon Sequestration," 2008 Society of Petroleum Engineers Eastern Regional/American Association of Petroleum Geologists Eastern Section Joint Meeting Co-author, "The Balancing of Coal and Coalbed Methane Interests Within the Coalbed Methane Statutory Schemes of Virginia, West Virginia and Kentucky," Journal of Natural Resources & Environmental Law, University of Kentucky College of Law, 2004-2005 MEMBERSHIPS AND AWARDS PROFESSIONAL Law 360 Female Powerbroker United States Patent and Trademark License Past President, Energy & Mineral Law Foundation, 2013-2014 Chambers USA America's Leading Lawyers for Business, Band One Leading Lawyer, Natural Resources The Best Lawyers in America® Best Lawyers® 2016 Charleston, WV, Energy Law, Lawyer of the Year Best Lawyers® Charleston, WV, Lawyer of the Year 2011 Super Lawyers® Outstanding Alumni of the Year, WVU Mineral & Energy Resources Department Guest Lecturer, Distinguished Lecture Series, WVU College of Engineering and Mineral Resources Duquesne University Law Review Graduated cum laude, West Virginia University, Petroleum Engineering Institute for Energy Law WVU College of Engineering and Mineral Resources Visiting Committee Peer Review Rated AV by Martindale-Hubbell Chair, Energy Law Committee, West Virginia State Bar EMLF Representative, Appalachian School of Law Energy Symposium Steering Committee Vice President & Trustee, Energy & Mineral Law Foundation Advisory Board, WVU College of Law Center for Energy and Sustainable Development

INDUSTRY/CIVIC Member, Advisory Committee, School of Petroleum and Natural Gas Engineering, West Virginia University North American Coalbed Methane Forum Independent Petroleum Association of America GABALTA Chair, Oil & Gas Subcommittee, West Virginia Chamber of Commerce Past Board Member, West Virginia Chamber of Commerce Past President, Alumni Association WVU Minerals & Energy Resources Department Vice Chair, Energy Committee, West Virginia Chamber of Commerce Vice Chair, Energy Working Group, West Virginia Chamber of Commerce Sharon O. Flanery | Member

The West Virginia Symphony Board of Directors Women's Energy Network

Erin McDowell, Division Counsel, Range Resources – Appalachia, LLC

Erin earned her undergraduate degree from Bucknell University and majored in Economics and Environmental Studies. She then attended the University Pittsburgh School of Law, graduating in 2004, and went on to work at the law firm Eckert Seamans Cherin & Mellott, which is headquartered in downtown Pittsburgh.

Erin’s ten years of private practice focused primarily on environmental compliance and litigation matters with a particular focus on the oil and gas industry. In January of this year, Erin joined Range as the third member of Range’s legal team, and serves as Division Counsel for all operations in Pennsylvania.

E. Nicholas (Nick) Jones Energy Advisor Corporate Strategic Planning Exxon Mobil Corporation

Nick Jones is an Energy Advisor in ExxonMobil's Corporate Strategic Planning Department.

In this capacity, he is responsible for assessing economic and energy trends, emerging energy technologies, and related market and public policy issues around the world. He is a principal contributor to ExxonMobil's long-term global energy outlook, including the identification of potential implications for energy markets and the Corporation's strategic plans. He is also active in communicating ExxonMobil's view of the energy future to a wide variety of audiences.

Nick has worked for ExxonMobil since 2001 in a variety of technical and management positions. He holds a B.S. in Chemical Engineering from the University of South Carolina and a Ph.D. in Chemical Engineering from Purdue University.

The Outlook for Energy: A View to 2040 U.S. Edition

U.S. Edition Modern energy for modern living

Gains in living standards over the past two centuries have been enabled in large part by a transition to modern energy sources.

One element driving this transition is the “energy density” of various energy types. Fuels high in energy content use less space and are often the easiest to transport for various 5 logs 1 gallon 13,000 uses. This helps explain why gasoline is prevalent as a transportation fuel and why (3.5 inch diameter, ==gasoline AA batteries people in high-rise buildings do not rely on wood for heating and cooking. 16 inch length)

To help compare energy content, we’ve converted some sources of energy used today to one of mankind’s earliest forms of energy: wood logs used as fuel for fire.

34 logs 7 logs 6 logs Daily U.S. energy Household Personal demand per person use transportation in 2010 = + +

Comfort and security Personal mobility

Fire was the first Kerosene and other Lighting for It used to take By the 1860s, the The same distance form of light and petroleum products cities is provided 25 days to travel trip could be made can now be heat, providing became widely used by one of the 2,000 miles by in 2 weeks by traveled by a safety, comfort and for their low cost most convenient stagecoach. steam locomotive. gasoline-powered security after dark. and versatility versus energy types — car in just 3 days. solid fuels. electricity.

4 exxonmobil.com/energyoutlook Then Now Then Now Energy fit for modern purposes

When selecting a type of energy for a particular need, many factors Technology and energy work together to provide practical solutions. are considered including practicality, convenience and cost. Energy This is what makes modern living standards possible and why we use content is often “lost” in burning a log or charging a battery, and logs a diversity of fuels. of wood can’t easily power a car nonstop for 300 miles. Gasoline has advantages on the road, but doesn’t compete well with batteries for powering a smartphone.

6 logs 4 logs 11 logs Commercial Commercial Industrial buildings + transportation + use

Productive workspaces Travel and trade Modern manufacturing

Before the late Steel frame Modern insulation, With the use The invention of Modern aircraft Prior to the The invention of Modern 19th century, office construction, lighting and of wind power steam-powered and jet fuel make Industrial the steam engine manufacturing buildings generally elevators, electric temperature in 1620, the ships allowed the flights across the Revolution, factory helped accelerate equipment now did not exceed five lighting and air control have Mayflower took same trip to be Atlantic faster, locations were the Industrial requires energy stories because of conditioning enabled greatly improved 66 days to cross made in two weeks. taking less than near fast-flowing Revolution and the dense fuels like construction costs and taller buildings, which commercial building the Atlantic. 8 hours. streams to use demand for coal. natural gas and the lack of elevators. maximized real estate. energy-efficiency. water power. electricity.

Now Then Now Then Now Then Now5 A sea change in U.S. energy Ten years ago, the United States was importing close to 60 percent of its oil, and making plans to import significant amounts of natural gas for the first time in history. Today, the prevailing conversation in the United States is not about a scarcity of energy supply, but rather an abundance.

6 exxonmobil.com/energyoutlook Advances in technology have unlocked oil and natural gas from shale As a result, North America is on track to become a net energy exporter for and other tight rock formations in states across the country, including the first time in recent history, with the United States making a significant Pennsylvania, Texas and North Dakota. With the addition of other new contribution. U.S. imports of oil are expected to drop to about one-tenth sources, such as Canadian oil sands and production from the deepwater the level of 10 years ago. And the country has the opportunity to meet its Gulf of Mexico, there has been a dramatic increase in U.S. energy supply, own needs and export significant amounts of liquefied natural gas (LNG) and further growth is projected. to help meet rising global demand for the clean-burning fuel.

But while supply is rising, America’s energy demand is not. U.S. petroleum This special edition of The Outlook for Energy takes a closer look at these demand actually is falling because the country is using energy more sea changes in U.S. energy, and what it means for the United States and efficiently in its cars and elsewhere. The country can grow its economy and the world from now through 2040. maintain living standards with less energy.

Pennsylvania natural gas production BCFD 12

Unconventional Conventional

8

Technology advances have 3 0 % enabled a rapid rise in oil and gas production in states across the U.S. Rise in U.S. unconventional gas production from 4 2010 to 2013

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 1H14

Source: Pennsylvania Department of Environmental Protection

7 The U.S. energy future By now, many Americans have heard about the renaissance in U.S. energy production. But what can be difficult to appreciate is the speed and scale of this transformation. After falling for decades, U.S. production of crude oil and other liquid fuels has risen by over 50 percent in just the past five years, to a rate of more than 11 million barrels per day (MBD). Natural gas production has risen by 40 percent since 2005, and is now at a record high. According to U.S. Energy Information Administration (EIA) estimates, the United States has passed Russia and Saudi Arabia to become the world’s largest oil and natural gas producer.

This new era of American energy abundance has had far-reaching positive impacts on the U.S. economy and global energy landscape.

8 exxonmobil.com/energyoutlook Rising energy production has helped the U.S. economy, creating As the United States produces more of its own oil, it’s importing a lot less. millions of new jobs and revitalizing communities. Rising production The share of U.S. liquid fuels consumption met by net imports fell to has also contributed billions in taxes and other government revenue. an average of 33 percent in 2013, down from more than 60 percent in 2005. Increased domestic energy supplies have also saved U.S. consumers The EIA expects that share to hit 20 percent in 2016 – the lowest level money on energy costs — more than $1,200 per household in 2012, since 1968. according to an IHS study. The Outlook projects that this energy renaissance will continue for years U.S. manufacturing has been revived. Energy intensive U.S. industries have to come. been boosted by the influx of abundant, affordable energy. The chemicals industry has seen a double benefit, since it uses natural gas and liquids both as a fuel and as a feedstock for plastics and other petrochemicals. Five years ago, the United States was on the verge of becoming a net importer of chemicals. Today, chemicals are once again America’s single biggest export — larger than agriculture, automobiles and aerospace.

U.S. refining crude supply Percent

Crude imports Domestic crude

2014 2005

Rising domestic oil production has reduced U.S. crude imports

Source: U.S. EIA, through Aug 2014

9 Roots of a renaissance

By 2040, U.S. production of crude and other liquids is projected to rise to Shale energy got its start in Texas in the 1980s, when an over 15 MBD — about a 70 percent increase from 2010. North America American innovator named George Mitchell worked to as a whole will see a similar growth rate through 2040, reaching combine two existing production technologies — hydraulic 26 MBD — more than twice the current production of Saudi Arabia. fracturing and horizontal drilling — and began to safely and Given the integration of energy infrastructure and trade between the U.S., economically extract the vast quantities of natural gas that Canada and Mexico, North America is often considered as a single energy were known to exist in shale rock. production region. As it turned out, those same technologies can be used to extract oil from shale and other tight rock formations. Other Similar growth rates are expected for natural gas. North American natural nations are exploring the use of shale technology, but for gas production is projected to rise by about 75 percent, to over 140 billion now, the United States and Canada are the only countries in cubic feet per day (BCFD) by 2040. the world with meaningful shale production.

North America liquids production North America gas production MBDOE BCFD 30 160 Combined oil and natural gas production Biofuels 140 is expected to grow through 2040, 25 Other as shale gas and tight oil combine with 120 other “unconventional” sources. NGLs 20 100

15 Oil sands 80 Unconventional

60 10 Tight oil

40 Deepwater 5 Conventional C&C 20 Conventional 0 0 2000 2020 2040 2000 2020 2040

10 exxonmobil.com/energyoutlook All of the growth in North American oil and gas production will come While U.S. energy production is rising, its energy consumption is declining from “emerging” sources — energy that technology has only recently as improvements to energy efficiency outpace underlying demand growth. made possible to produce economically. These include shale gas and its The United States led the world in energy demand growth throughout the associated natural gas liquids (NGLs), tight oil, deepwater Gulf of Mexico, past century. But like many developed economies, the United States has and Canadian oil sands. By 2040, emerging sources are projected reached a watershed moment, where energy use is already so pervasive that to account for 80 percent of North America’s liquids production, big increases in energy demand are no longer needed to sustain population and 85 percent of its natural gas. growth and economic expansion.

For example, home and vehicle ownership rates tend to rise as countries grow more prosperous, driving up energy demand. But there is a practical limit to how many homes and cars people can have. The United States already has more than 75 cars for every 100 people. By contrast, in China today, there are about 10 cars for every 100 people.

55% Improvements to energy efficiency are likely to produce a net decline in Less energy demand per U.S. energy demand for the first time in history. From 2010 to 2040, the U.S. energy trends dollar of U.S. GDP in 2040, U.S. population will grow moderately, its economy will double but its Indexed to 2000 energy demand is expected to decline slightly, by about 5 percent. 3 compared to 2010

2.5 GDP

2

1.5 Population

1 Demand Carbon emissions 0.5

0 2000 2020 2040

11 Efficiency improvements are expected to reduce energy consumption in In the electricity generation sector, utilities and other power generators each of the four main demand sectors. are shifting away from coal in favor of low- or no-emissions fuels such as natural gas, renewables and nuclear. This shift is expected to accelerate as • The most dramatic efficiency impacts are seen in the Transportation U.S. environmental policies raise the effective “cost of carbon” for various sector, where U.S. demand for gasoline is falling as passenger cars fuels. In 2000, 50 percent of America’s electricity was produced from coal; become more fuel-efficient. The average new U.S. car in 2040 by 2040, it will likely be about 10 percent. is expected to get 47 on-road miles per gallon, compared to 25 mpg today, mostly because of projected growth in hybrid vehicles. As a result of this shift toward cleaner fuels, plus ongoing gains in efficiency, Commercial transportation needs will continue to grow despite U.S. energy-related carbon dioxide emissions are expected to decline by efficiency gains, and will drive up U.S. demand for diesel and jet fuel. more than 25 percent through 2040, reversing decades of steady increases.

• Demand in the residential/commercial and industrial sectors will U.S. energy demand by sector fall due to efficiency gains such as improved insulation and lighting for Quadrillion BTUs buildings and the further use of advanced manufacturing technologies 120 and processes.

100 • In the largest energy-demand sector, electricity generation, U.S. demand for electricity will continue to grow, but the energy required Res/comm 80 to produce that electricity should decrease as the use of cleaner, Industrial more efficient fuels like natural gas make a greater contribution. 60

Electricity generation 40

20 Transportation Gasoline

0 2000 2020 2040

12 exxonmobil.com/energyoutlook It is important to note that trends in the United States and other “Energy is a critical part of boosting prosperity well-developed economies are different from trends in the rest of the and eradicating poverty.” world, where energy demand and emissions continue to rise. While energy — Jim Yong Kim, President, World Bank Group demand in the United States and other developed nations is projected to fall by about 5 percent from 2010 to 2040, demand in developing nations (where 80 percent of the world’s population lives) should rise by nearly 70 percent. Globally, demand is expected to rise by 35 percent.

U.S. energy-related CO2 emissions U.S. energy supply by fuel by sector Quadrillion BTUs Billion tonnes 120 7

100 6

Other renewables 5 80 Biomass Nuclear 4 Coal Res/comm 60 Industrial Gas 3 40 2 Transportation

20 Oil ex bio 1 Electricity generation Coal

0 0 2000 2020 2040 2000 2020 2040

Overall U.S. energy demand declines but natural gas, Anticipated declining coal usage is the biggest factor

renewables and nuclear should take a greater share behind an expected sharp drop in U.S. CO2 emissions

13 North America’s new trade opportunity

With its production rising and demand falling, North America is on track to become a net exporter of energy by about 2020, and the United States could be a significant contributor to those expanding trade opportunities.

14 exxonmobil.com/energyoutlook Becoming an energy exporter would mean a new economic opportunity A study commissioned by the U.S. Department of Energy (DOE) for the United States, and a changed role for the nation on the world investigated U.S. LNG exports in the range of 6 to 12 BCFD. The study energy stage. The United States will still want to integrate with global concluded that the higher the level of LNG exports, the more the U.S. energy markets for certain types of energy to meets its needs – creating an economy would benefit. interdependence as well as energy security. The DOE is currently studying LNG export levels ranging from The export opportunities are largest for natural gas. Most of the markets 12 to 20 BCFD. Exports at these levels would represent only a small for this gas are overseas – in places such as Japan and South Korea, which fraction of U.S. natural gas demand over The Outlook period, and an even have high gas demand but little indigenous resource. As a result, most of smaller share of the estimated remaining U.S. natural gas resource. America’s gas exports will be in the form of LNG, which is natural gas that is liquefied for transport by ship, rather than by pipeline.

U.S. gas U.S. gas demand Thousand TCF BCFD 100 0 1 2 3

Remaining recoverable 80 Res/comm resource as of Jan. 2011*

Cumulative use U.S. natural gas resources are far 2011-2040 60 Industrial greater than projected consumption plus LNG exports

Conventional Unconventional 40 Domestic demand LNG exports Electricity generation 20 *Source: EIA Annual Energy Outlook 2013

0 Transportation 2000 2010 2020 2030 2040

15 We believe that, in time, U.S. LNG exports are likely to be in the higher In the United States, imports should continue to decline. U.S. net imports range currently being studied by DOE due to the scale of global demand for of liquid supplies are projected to fall to under 2 MBD by 2040, about natural gas. In Europe and Asia Pacific, imports are projected to account one-tenth the levels seen just 10 years ago. The growth in U.S. tight oil has for over half of gas demand by 2040. As an example, even at the high end been rapid as evidenced by the surge in production from places like Texas of the DOE study range, cumulative LNG exports through 2040 would still and North Dakota. Every year producers increase their drilling effectiveness be only 5 percent of the EIA estimate of America’s remaining recoverable while estimates of the size of the resource steadily increase. In fact, North gas resources. Dakota just recently surpassed 1 MBD of oil production.

Rising production will create new trading opportunities for oil, too. The trading picture for crude is more complex than for natural gas, because North America should shift to a net liquids exporter, as production is lifted unlike natural gas, there are different grades of crude oil. by growth in U.S. tight oil, Canadian oil sands and other supplies such as NGLs. By 2040, North American production is expected to exceed liquids The nation’s 140 refineries use crude as feedstock to make a range of demand by approximately 15 percent. products, including gasoline, diesel fuel and asphalt. But each refinery can process only so much of each grade before running into bottlenecks.

“Total U.S. net imports of energy as a share of energy consumption fell to their lowest level in 29 years for the first six months of 2014.” — U.S. EIA 4 MBD Rise in U.S. production of crude oil and other liquids since 2009

16 exxonmobil.com/energyoutlook As a result, to most effectively meet the needs of U.S. energy consumers, In fact, as production continues to grow, the United States will need to the United States could export certain types of crude, while importing export its surplus production or else risk forcing production to be curtailed, others. These balances can and will change with market conditions. along with the jobs and economic growth that come with it.

When considered as a region, North America is expected to be a The sea changes in U.S. energy — rising production and falling demand — significant energy exporter by 2040. Other energy forecasters have continue to provide new jobs and economic benefits to the nation. Informed reached similar conclusions. consumer choices and effective government policies are needed to best meet the complex energy challenges and opportunities facing the U.S., Just as the United States benefits from exporting agricultural products, North America and the world. cars and computer parts, it also can benefit from exporting energy.

Rising crude oil production North America liquids supply and demand MBD MBDOE 4.5 30

4.0 25 Canada oil sands 3.5 North Dakota Liquids demand Texas 3.0 20 Canada/Mexico other As production rises and demand Canada/Mexico C&C declines, North America can 2.5 become a net liquids exporter 15 2.0 U.S. tight oil

1.5 10 U.S. other 1.0 5 ‘10 0.5 U.S. C&C 0 0 1990 1995 2000 2005 2010 2015 1980 2010 2040

17 Data Energy demand (quadrillion BTUs) unless otherwise indicated Average annual change % change 2010 2025 2010 2010 2025 2010 Share of total Regions 1990 2000 2010 2025 2040 2025 2040 2040 2025 2040 2040 2010 2025 2040

United States Primary 81 96 94 94 90 0.0% -0.3% -0.2% 0% -5% -5% 100% 100% 100% Oil 35 40 38 37 33 -0.2% -0.7% -0.5% -3% -10% -13% 40% 39% 37% Gas 17 22 22 28 31 1.4% 0.7% 1.0% 24% 10% 36% 24% 29% 34% Coal 19 22 20 13 6 -2.8% -5.4% -4.1% -34% -57% -72% 21% 14% 6% Nuclear 6899120.6% 1.4% 1.0% 9% 23% 34% 9% 10% 13% Biomass/waste 233320.2% -0.4% -0.1% 3% -6% -4% 3% 3% 3% Hydro 111110.9% 0.7% 0.8% 14% 11% 26% 1% 1% 1% Other renewables 112354.1% 3.0% 3.5% 83% 55% 183% 2% 4% 6%

End-use demand (including electricity) Total end-use 62 72 70 72 70 0.2% -0.2% 0.0% 3% -3% 0% 100% 100% 100% Residential/commercial 15 18 19 19 19 0.0% 0.0% 0.0% 0% 0% 0% 27% 27% 27% Transportation 22 27 27 26 24 -0.4% -0.4% -0.4% -6% -6% -12% 39% 36% 34% Industrial 24 27 24 27 27 0.9% -0.1% 0.4% 15% -1% 14% 34% 38% 38% Memo: electricity demand 9 12 13 15 17 0.7% 0.8% 0.7% 11% 12% 24% 19% 20% 23% Power generation fuel1 29 37 37 37 36 -0.1% -0.1% -0.1% -2% -1% -3% 40% 39% 40%

North America Primary 95 114 113 118 115 0.3% -0.2% 0.0% 4% -3% 1% 100% 100% 100% Oil 42 49 47 47 44 0.1% -0.5% -0.2% 1% -7% -6% 41% 40% 38% Gas 21 26 28 36 40 1.7% 0.6% 1.2% 29% 10% 42% 25% 31% 34% Coal 20 23 21 14 6 -2.6% -5.3% -3.9% -32% -56% -70% 19% 12% 5% Nuclear 7 9 10 10 13 0.3% 1.4% 0.9% 5% 23% 30% 9% 9% 11% Biomass/waste 343330.1% -0.7% -0.3% 2% -10% -8% 3% 3% 3% Hydro 222230.7% 0.4% 0.6% 12% 6% 18% 2% 2% 2% Other renewables 112474.5% 3.2% 3.8% 93% 60% 209% 2% 4% 6% End-use demand (including electricity) Total end-use 73 86 87 93 92 0.4% 0.0% 0.2% 7% -1% 6% 100% 100% 100% Residential/commercial 18 22 23 23 23 0.2% 0.0% 0.1% 2% 0% 3% 26% 25% 25% Transportation 25 31 32 32 31 -0.2% -0.2% -0.2% -2% -3% -6% 37% 34% 33% Industrial 30 34 32 38 38 1.2% 0.1% 0.6% 19% 1% 21% 36% 41% 41% Memo: electricity demand 11 15 16 18 20 0.9% 0.8% 0.8% 14% 13% 29% 18% 20% 22% Power generation fuel1 33 42 43 44 44 0.1% 0.0% 0.1% 2% 0% 2% 38% 37% 38%

World Primary 360 418 526 662 717 1.6% 0.5% 1.0% 26% 8% 36% 100% 100% 100% Oil 137 157 178 212 228 1.2% 0.5% 0.8% 19% 7% 28% 34% 32% 32% Gas 72 89 116 158 189 2.1% 1.2% 1.6% 37% 19% 63% 22% 24% 26% Coal 86 93 135 164 138 1.3% -1.1% 0.1% 22% -16% 2% 26% 25% 19% Nuclear 21 27 29 38 56 1.9% 2.7% 2.3% 32% 49% 97% 5% 6% 8% Biomass/waste 36 41 49 56 56 0.9% 0.0% 0.5% 14% 1% 15% 9% 8% 8% Hydro 7 9 12 16 20 2.3% 1.3% 1.8% 40% 21% 70% 2% 2% 3% Other renewables 1 3 7 18 29 6.3% 3.4% 4.8% 149% 65% 311% 1% 3% 4%

End-use demand (including electricity) Total end-use 291 330 409 511 556 1.5% 0.6% 1.0% 25% 9% 36% 100% 100% 100% Residential/commercial 87 98 115 135 147 1.1% 0.5% 0.8% 17% 9% 27% 28% 26% 26% Transportation 65 81 100 122 140 1.3% 0.9% 1.1% 22% 15% 40% 24% 24% 25% Industrial 139 151 193 254 269 1.8% 0.4% 1.1% 31% 6% 39% 47% 50% 48% Memo: electricity demand 35 45 63 94 119 2.6% 1.6% 2.1% 48% 27% 87% 15% 18% 21% Power generation fuel1 118 144 192 258 291 2.0% 0.8% 1.4% 34% 13% 51% 37% 39% 41%

Energy-related CO2 emissions (billion tonnes) World 21.3 23.9 30.7 37.4 36.9 1.3% -0.1% 0.6% 22% -2% 20% 100% 100% 100% North America 5.6 6.6 6.5 6.2 5.2 -0.3% -1.1% -0.7% -4% -16% -19% 21% 17% 14% United States 4.9 5.7 5.5 5.0 4.0 -0.7% -1.4% -1.0% -10% -19% -26% 18% 13% 11% 1Share based on total primary energy 18 exxonmobil.com/energyoutlook Exxon Mobil Corporation Corporate Headquarters 5959 Las Colinas Blvd. Irving, Texas 75039-2298 exxonmobil.com

The Outlook for Energy includes Exxon Mobil Corporation’s internal estimates and forecasts of energy demand, supply, and trends through 2040 based upon internal data and analyses as well as publicly available information from external sources including the International Energy Agency. This report includes forward looking statements. Actual future conditions and results (including energy demand, energy supply, the relative mix of energy across sources, economic sectors and geographic regions, imports and exports of energy) could differ materially due to changes in economic conditions, technology, the development of new supply sources, political events, demographic changes, and other factors discussed herein and under the heading “Factors Affecting Future Results” in the Investors section of our website at www.exxonmobil.com. This material is not to be used or reproduced without the permission of Exxon Mobil Corporation. All rights reserved.

SP-138 US ExxonMobil Speakers Coalition The Outlook for Energy: A View to 2040 2015 Abstract

Forecasting long-term energy trends begins with a simple fact: people need energy. Over the next few decades, population and income growth — and an unprecedented expansion of the global middle class — are expected to create new demands for energy. And as people’s needs and modern technologies continue to evolve, so too will the energy landscape.

The scale and nature of this challenge is readily apparent in ExxonMobil’s Outlook for Energy: A View to 2040, our long-term global forecast of energy demand and supply trends. For example:

• As global economic output more than doubles by 2040, energy demand will increase about 35 percent, even with significant efficiency gains. Energy demand in developing (Non OECD) nations will rise about two-thirds, driving nearly all of the global increase. Ongoing progress poses the dual challenge of • Rising demand for electricity remains the single meeting the world’s energy needs to advance living largest influence on global energy consumption. standards while managing the environmental effects Through 2040, it will account for half of the rise in — including climate change — of energy use. There is global energy demand. no single or simple solution to this challenge. However, practical options to meet people’s needs for reliable, • Transportation energy demand will rise about affordable energy continue to expand, and gains in 40 percent, driven by expanding commercial efficiency worldwide will help significantly reduce activity. However, global energy used for personal demand growth. In addition, a gradual transition to vehicles will be relatively flat, as significant fuel less carbon-intensive energy sources like natural gas, economy gains offset growth in the worldwide fleet. nuclear and renewables will help curb global energy-

related CO2 emissions, which are likely to peak around • Technology is enabling the safe development of 2030 and then gradually decline. once hard-to-produce energy resources, significantly expanding available supplies. Oil and natural gas Understanding the factors that drive the world’s will supply about 65 percent of the growth in energy energy needs — and likely choices to meet those demand to 2040. Use of nuclear power and needs — is the mission of The Outlook, a view that renewable energy will also grow, while demand for ExxonMobil uses to guide our own strategies and coal will peak around 2025 and then decline. investments. By sharing The Outlook, we hope to broaden that understanding among individuals, • Evolving demand and supply patterns will open the businesses and governments. Energy matters to door for increased global trade opportunities. The everyone, and we all play a role in shaping its future changing energy landscape, in conjunction with an and helping advance prosperity. abundance of free trade opportunities, will help lead to more choices and creation of value that helps fuel economic growth and improve living standards worldwide. The Outlook for Energy:

A View to 2040

Nicholas Jones September 10, 2015

This presentation includes forward-looking statements. Actual future conditions (including economic conditions, energy demand, and energy supply) could differ materially due to changes in technology, the development of new supply sources, political events, demographic changes, and other factors discussed herein and under the heading "Factors Affecting Future Results" in the Investors section of our website at: www.exxonmobil.com. The information provided includes ExxonMobil's internal estimates and forecasts based upon internal data and analyses as well as publically-available information from external sources including the International Energy Agency. This material is not to be used or reproduced without the permission of Exxon Mobil Corporation. All rights reserved. Energy Outlook Development

100 countries

15 demand sectors

20 fuel trade types flows

technology & policy

2 ExxonMobil 2015 Outlook for Energy 2010 World Daily Energy Demand

U.S. Per Capita World Per Capita 7 1.7

Times 7 billion people =

~12 billion gallons per day

260 MBDOE 525 QUADS

3 ExxonMobil 2015 Outlook for Energy Global Progress Drives Demand

Population GDP Energy Demand Billion Trillion 2010$ QuadrillionQdilliBTUQuadrillion BTUBTUss

EEnergynergy SavingsSavings

Rest of World

Key Growth India China OECD*

*Mexico and Turkey included in Key Growth countries

4 ExxonMobil 2015 Outlook for Energy The Middle Class Continues to Grow

Middle Class per The Brookings Institution Billion People

RestRes of World

KeyKey Growth Turkey Iran China Egypt ChinaChi India Mexico Saudi Arabia Thailand Nigeria

Brazil IndIndia Indonesia

South Africa OECD*OEC

*Mexico and Turkey included in Key Growth countries

5 ExxonMobil 2015 Outlook for Energy Electricity Generation Leads Growth

Energy Demand by Sector Quadrillion BTUs

‘40‘40

Electricity Demand ‘25‘25

‘10‘10

Electricity Industrial Transportation Res/Comm Generation

6 ExxonMobil 2015 Outlook for Energy Transportation

7 ExxonMobil 2015 Outlook for Energy Transportation Demand

Sector Demand MBDOE

Rail

Marine

Aviation

Heavy Duty

Light Duty

8 ExxonMobil 2015 Outlook for Energy Light Duty Vehicle Efficiency

Fleet by Type Range of Average Vehicle Efficiency Million On-Road Miles per Gallon

AverageAvera FleetFleet

EEuropeurope

U.S.U.S.

9 ExxonMobil 2015 Outlook for Energy Transportation Fuel Demand

World United States MBDOE MBDOE

Other Natural Gas

Fuel Oil Jet Fuel

Biodiesel

Diesel

Ethanol

Gasoline

10 ExxonMobil 2015 Outlook for Energy Industrial

11 ExxonMobil 2015 Outlook for Energy Industrial Demand

Industrial Demand by Sector Quadrillion BTUs

Paint

Fertilizer Plastics

Chemical Automobiles Textiles Steel Heavy Industry Natural Gas Liquid CoalCoao Agriculture Fuels Energy Industry Lubricants Other Asphalt

12 ExxonMobil 2015 Outlook for Energy Electricity Generation

13 ExxonMobil 2015 Outlook for Energy Electricity Demand

Electricity Demand Electricity Demand by Region Thousand TWh Thousand TWh

2014 China Improved Standard of Living

Population Growth

Key Growth Industrial Growth United States

Europe India

Base Demand

14 ExxonMobil 2015 Outlook for Energy Fuel Choices for Power Generation

Relative Coal w/ Natural Solar Coal Nuclear Wind benefit/impact CCS Gas Photovoltaic

Construction Cost

Electricity Cost

Land Use

Water Requirements

CO2 Emissions

Non-CO2 Emissions

Waste Products

Availability

Flexibility

More Favorable Less Favorable

Source: EPRI, Generation Technology Assessment

15 ExxonMobil 2015 Outlook for Energy Electricity Generation Fuel by Region

Quadrillion BTUs

‘10 ‘25 ‘40 Other Solar Wind

Nuclear

Coal

Gas

Oil Key Growth

*Mexico and Turkey included in Key Growth countries

16 ExxonMobil 2015 Outlook for Energy Global Demand

2040 By Fuel Quadrillion BTUs

Average Growth / Yr. 0.8% 2010 - 2040

1.6% 1.0% 2010

0.1%

0.5% 2.3%

5.8% 1.8%

17 ExxonMobil 2015 Outlook for Energy CO2 Emissions

18 ExxonMobil 2015 Outlook for Energy World Emissions

CO2 Emissions by Region Emissions per Capita Billion metric tonnes Tonnes / Person

‘10 Rest of World

Key Growth ‘40

India

China

OECD*

*Mexico and Turkey included in Key Growth countries

19 ExxonMobil 2015 Outlook for Energy Supply

20 ExxonMobil 2015 Outlook for Energy Liquids Supply

World Supply by Type Crude & Condensate Resource Estimates MBDOE Trillion Barrels

Biofuels Other

Natural Gas Liquids Tight Oil Oil Sands Deepwater

New Conventional C&C Development

ConventionalCoonvn entional Crude & CondCondensateennsas tete Developed Conventional Crude & Condensate

Source: USGS and IEA historical estimates

21 ExxonMobil 2015 Outlook for Energy Rising Crude Oil Production

North Dakota and Texas Crude Oil Production MBD

Source: U.S. Energy Information Administration; 2014 through August North Dakota Department of Mineral Resources

22 ExxonMobil 2015 Outlook for Energy Liquids Trade Balance by Region

MBDOE

DemandDemand BBiofuels OtherO

NNatural Gas Liquids

TTight Oil

OOil Sands

DDeepwater

CConventional C&C Development

‘10 ‘20 ‘30 ‘40 ConventionalC Crude & Condensate

NorthNorth America

23 ExxonMobil 2015 Outlook for Energy Liquids Trade Balance by Region

MBDOE Biofuels Other Natural Gas Liquids Tight Oil Oil Sands Deepwater Conventional C&C Development Conventional Crude & Condensate Demand

‘10 ‘20 ‘30 ‘40 North Latin Africa Europe Russia/ Middle Asia America America Caspian East Pacific

24 ExxonMobil 2015 Outlook for Energy Remaining Global Gas Resource

Over 200 years coverage at 6.7 current demand

3.9 1.6 4.8

Europe Russia/ OECDD Caspian* North Americaa 4.9

1000 TCF Middle East 3.6

3.0 Unconventional Asia Pacific

Africa Latin America Conventional

Source: IEA; *Includes Europe Non OECD

25 ExxonMobil 2015 Outlook for Energy Gas Trade Balance by Region

BCFD

Unconventional Production Conventional Production Demand

‘10 ‘20 ‘30 ‘40

North Latin Africa Europe Russia/ Middle Asia America America Caspian East Pacific

26 ExxonMobil 2015 Outlook for Energy Energy Trade

Indicative trade flows

27 ExxonMobil 2015 Outlook for Energy Energy Trade

Liquids Demand Gas Demand MBDOE BCFD

Imports/Exports LNG

Pipeline

Local Production Local Production

28 ExxonMobil 2015 Outlook for Energy Developing Economies Dominate Growth

Demand by Region Quadrillion BTUs

Rest of World

Key Growth

India

China

OECD*

*Mexico and Turkey included in Key Growth countries

29 ExxonMobil 2015 Outlook for Energy Energy Use Evolves Over Time

Demand by Fuel Quadrillion BTUs

Other Renewables

Nuclear Hydro

Gas

Oil

Coal

Biomass

30 ExxonMobil 2015 Outlook for Energy For more information, visit exxonmobil.com/energyoutlook or download the ExxonMobil app

Greg Matlock is a Partner/Principal in EY’s National Tax Department – Energy (Houston based)

Prior to joining EY, Greg was a tax lawyer at Norton Rose Fulbright

Greg serves as EY’s US MLP Leader

Greg also serves as EY’s Energy Fund Center of Excellence (COE) Markets Leader

Experience

His practice is focused on U.S. federal income tax planning and structuring for business transactions involving partnerships (including MLPs) and corporations, with particular emphasis on oil and gas investments. Greg has lead numerous, significant MLP and public monetization feasibility projects and analysis (including MLP IPO structure analysis, qualifying income analysis, as well as other tax and economic planning matters), and has worked on MLPs and public transactions both as a lawyer and in his current role in EY. Similarly, Greg has assisted companies in evaluating various public monetization structures, including MLPs, Up-C transactions, C Corporation IPOs, YieldCos, and REITs.

Greg is a frequent speaker (and writer) on MLP issues, as well as on energy tax and transaction matters. Greg has been published, appeared, or has spoken in the following: Oil & Gas Investor Magazine, Oil & Gas Financial Journal, Oil & Gas Investor Capital Formation Supplement, Houston Chronicle, Financial Times, Houston Business Journal, BNA, Inc. Daily Tax Real Time, Natural Gas Intelligence – The Weekly Gas Market Report, SNL Energy – Gas Utility Week, Bloomberg BNA MLP, Louisiana Energy Conference, Tax Executives Institute, Capital Link Annual MLP Forum, American Petroleum Institute’s Federal Tax Forum, Energy M&A and Financing Forum, Texas CEO Magazine, Oil and Gas Eurasia, FuelFix, Oil, Gas, and Energy Law Journal, Midstream Business, American Oil & Gas Journal, IPAA and the IPAA Private Capital Conference, and others.

Greg also has significant experience in advising domestic and international oil and gas companies in connection with upstream, midstream, downstream and oilfield service company transactions. Greg has represented investors and companies in various types of inbound and domestic oil and gas investments and transactions, including tax partnerships, limited partnerships, and other joint venture structures, including tax issues related to such structures. STEPHEN T. OLSON [email protected] PARTNER Houston Energy (T) +1.832.239.3744 M&A (F) +1.832.239.3600 Private Equity Joint Ventures & Strategic Alliances Africa Practice

HONORS & DISTINCTIONS Stephen Olson's practice focuses on M&A, private equity investments, capital markets, and corporate "Rising Star": New York Metro Super Lawyers (2014 and 2015) and Texas Super governance matters for U.S. and non-U.S. clients. He Lawyers (2011, 2013-2015) counsels clients in connection with public and private M&A Advisor Middle Market Deal of the Year Award (2010) acquisition and divestiture transactions, complex M&A Advisor Sector Deal of the Year ($100 million to $1 billion), technology, corporate transactions such as joint ventures and major media, and telcom category (2012) capital projects, registered offerings and private Judge, M&A Advisor International M&A Awards (2015) placements of debt and equity securities, as well as EDUCATION corporate governance and other general corporate matters. His representations range from private to The University of Texas at Austin (J.D. 2006); The University of Georgia mature public companies to private equity firms. (B.B.A. in Banking and Finance 2002) Stephen has worked with global consulting, engineering, BAR ADMISSIONS energy, and financial services firms in transactions with a combined value of more than US$9 billion in the past Texas and New York three years. He has guided clients through each step of complicated and multistage transactions as well as directed efforts of international local counsel.

Stephen maintains an active pro bono practice and regularly serves as outside legal advisor to one of the largest NGOs in the world. He works with international financial institutions, such as The World Bank and the International Monetary Fund (IMF), on projects related to oil and gas concessions, including bid and auction processes, financing related to natural resource assets, oil wealth safeguarding and stewardship, and foreign compliance issues for Western companies doing business in Africa. He regularly travels and meets with national ministries and other government officials in efforts to help facilitate use of hydrocarbon and mining wealth to build sustainable infrastructures and improve basic living conditions in various African nations.

Stephen is a senior advisor to the Ghana Oil Club (Accra, Ghana) and a member of the Young Professionals in Energy (New York, Houston, and London chapters).

July 2015- Print Pages Page 1 of 3

http://digital.ogfj.com/ogfj/201507/Print_submit.action?articleTitle=&articlePrintMode=fals... 7/9/2015 July 2015- Print Pages Page 2 of 3

http://digital.ogfj.com/ogfj/201507/Print_submit.action?articleTitle=&articlePrintMode=fals... 7/9/2015 July 2015- Print Pages Page 3 of 3

http://digital.ogfj.com/ogfj/201507/Print_submit.action?articleTitle=&articlePrintMode=fals... 7/9/2015 8/28/2015

ϲƚŚ>ĂǁŽĨ^ŚĂůĞWůĂLJƐŽŶĨĞƌĞŶĐĞ ^ĞƉƚĞŵďĞƌϭϬ͕ϮϬϭϱ WŝƚƚƐďƵƌŐŚ͕W

WƌŝǀĂƚĞĂŶĚWƵďůŝĐĂƉŝƚĂůZĂŝƐĞƐĂŶĚ džŝƚdƌĂŶƐĂĐƚŝŽŶƐŝŶdŽĚĂLJ͛Ɛ^ŚĂůĞWůĂLJƐ

'ƌĞŐDĂƚůŽĐŬ͕ƌŶƐƚΘzŽƵŶŐ ^ƚĞƉŚĞŶKůƐŽŶ͕:ŽŶĞƐĂLJ

Ϯ

ƵƌƌĞŶƚ/ŶĚƵƐƚƌLJKǀĞƌǀŝĞǁ

ƒ ^ŝŶĐĞ^ĞƉƚĞŵďĞƌϮϬϭϰ͕ƚŚĞ ƉƌŝĐĞŽĨtd/ŚĂƐĚĞĐƌĞĂƐĞĚ ĂƉƉƌŽdžŝŵĂƚĞůLJ΀ͺͺ΁й͕ĨƌŽŵĂŶ ĂǀĞƌĂŐĞƉƌŝĐĞŽĨΨϵϮ͘ϱϴͬďďů ƚŽ΀ΨϰϬͲ Ψϰϱͬďďů΁ŶĞĂƌƚŚĞ ĞŶĚŽĨƵŐƵƐƚϮϬϭϱ͘ ƒ KǀĞƌƚŚĞƐĂŵĞƚŝŵĞƉĞƌŝŽĚ͕ ƚŚĞƉƌŝĐĞŽĨŶĂƚƵƌĂůŐĂƐŚĂƐ ĚĞĐƌĞĂƐĞĚĂƉƉƌŽdžŝŵĂƚĞůLJϯϰй͘

1 8/28/2015

ϯ

^ƵƉƉůLJͬĞŵĂŶĚ/ŵďĂůĂŶĐĞ ƒ dŚĞŐůŽďĂůŚLJĚƌŽĐĂƌďŽŶƐƵƉƉůLJĂŶĚĚĞŵĂŶĚŝŵďĂůĂŶĐĞ ĐŽŶƚŝŶƵĞƐƚŽǁŝĚĞŶ͕ǁŝƚŚƉƌĞĚŝĐƚŝŽŶƐƚŚĂƚƚŚĞŝŵďĂůĂŶĐĞ ǁŝůůĐŽŶƚŝŶƵĞƚŽǁŝĚĞŶǁĞůůŝŶƚŽϮϬϭϲ͘ ƒ KWĐŽƵůĚƉŽƚĞŶƚŝĂůůLJŝŶĐƌĞĂƐĞĐƌƵĚĞŽŝůƉƌŽĚƵĐƚŝŽŶƚŽ ĂƌĞĐŽƌĚϯϯŵŝůůŝŽŶďĂƌƌĞůƐĂĚĂLJĂĨƚĞƌŝŶƚĞƌŶĂƚŝŽŶĂů ƐĂŶĐƚŝŽŶƐĂƌĞƌĞŵŽǀĞĚĂŐĂŝŶƐƚ/ƌĂŶ͘ ƒ WĞƌ/ƌĂŶ͕ƚŚĞĐŽƵŶƚƌLJĐĂŶƐƚŽƵƚƉƵƚďLJϱϬϬ͕ϬϬϬͬďďůĂ ĚĂLJǁŝƚŚŝŶĂǁĞĞŬĨŽůůŽǁŝŶŐƚŚĞƌĞŵŽǀĂůŽĨƚŚĞ ƐĂŶĐƚŝŽŶƐ͘ ƒ ƐŽĨŵŝĚͲƵŐƵƐƚϮϬϭϱ͕ƚŚĞŐůŽďĂůŽŝůŵĂƌŬĞƚǁĂƐŝŶ ƐƵƌƉůƵƐďLJĂďŽƵƚϯŵŝůůŝŽŶďĂƌƌĞůƐĂĚĂLJ͘

ϰ

ZŝŐŽƵŶƚZĞĚƵĐƚŝŽŶ

ƒ ^ŝŶĐĞƵŐƵƐƚϮϬϭϰ͕ƚŚĞh^ ƌŝŐĐŽƵŶƚĚĞĐƌĞĂƐĞĚďLJ ĂƉƉƌŽdžŝŵĂƚĞůLJϱϰй͘ ƒ KǀĞƌƚŚĞƐĂŵĞƉĞƌŝŽĚ͕ƚŚĞ ƌŝŐĐŽƵŶƚŝŶƚŚĞDĂƌĐĞůůƵƐ ĚĞĐƌĞĂƐĞĚĂƉƉƌŽdžŝŵĂƚĞůLJ ϯϭйĂŶĚĂƉƉƌŽdžŝŵĂƚĞůLJ ϱϬйŝŶƚŚĞhƚŝĐĂ͘

2 8/28/2015

ϱ

^ŚĂůĞWůĂLJ/ŵƉĂĐƚ

ƒ ƵƌƌĞŶƚƉƌŝĐŝŶŐĂŶĚĞĐŽŶŽŵŝĐĐŽŶĚŝƚŝŽŶƐƉƌĞƐĞŶƚ ƐĞƌŝŽƵƐĐŚĂůůĞŶŐĞƐĨŽƌĞdžƉůŽƌĂƚŝŽŶĂŶĚƉƌŽĚƵĐƚŝŽŶ ĐŽŵƉĂŶŝĞƐ͕ĐĂƵƐŝŶŐĐŽŵƉĂŶŝĞƐƚŽĐŽŶƐŝĚĞƌ͗ ƒ ĐƵƚĐĂƉĞdžďƵĚŐĞƚ ƒ ƐĐĂůĞďĂĐŬĚƌŝůůŝŶŐƉƌŽŐƌĂŵƐ ƒ ĂƐƐĞƚƐĂůĞƐ ƒ ƌĞĚƵĐƚŝŽŶŝŶĂƐƐĞƚĂĐƋƵŝƐŝƚŝŽŶƐ

ϲ

^ŚĂůĞWůĂLJ/ŵƉĂĐƚ

ƒ tŝƚŚƐƵƐƚĂŝŶĞĚůŽǁĞƌĐŽŵŵŽĚŝƚŝĞƐƉƌŝĐĞƐ͕ďŽƌƌŽǁŝŶŐ ďĂƐĞƌĞĚĞƚĞƌŵŝŶĂƚŝŽŶƐŝŶƚŚĞĨĂůůŽĨϮϬϭϱǁŝůůůŝŬĞůLJ ƌĞƐƵůƚŝŶƌĞĚƵĐĞĚďŽƌƌŽǁŝŶŐĂďŝůŝƚLJƵŶĚĞƌĂƚLJƉŝĐĂů ĞΘƉĐŽŵƉĂŶLJ͛ƐƌĞƐĞƌǀĞͲďĂƐĞĚůĞŶĚŝŶŐĨĂĐŝůŝƚLJ͕ ůĞĂĚŝŶŐƚŽƌĞĚƵĐĞĚůŝƋƵŝĚŝƚLJ͘

3 8/28/2015

ϳ

&ĂůůZĞĚĞƚĞƌŵŝŶĂƚŝŽŶƐ

ŽŵƉĂŶLJ ZĞĚĞƚĞƌŵŝŶĂƚŝŽŶ KƚŚĞƌZŝƐŬ&ĂĐƚŽƌƐ ZĞƐŽůƵƚĞ ŶĞƌŐLJ ^ĞƉƚĞŵďĞƌ dŚŝŶŶŝŶŐůŝƋƵŝĚŝƚLJ͘EŽĨƵƌƚŚĞƌďŽƌƌŽǁŝŶŐĐĂƉĂĐŝƚLJ DŝĚƐƚĂƚĞƐWĞƚƌŽůĞƵŵ KĐƚŽďĞƌ ŽǀĞŶĂŶƚǀŝŽůĂƚŝŽŶŝŶϮϬϭϲ ^ĂŶĚZŝĚŐĞŶĞƌŐLJ KĐƚŽďĞƌ DŝŶŝŵƵŵůŝƋƵŝĚŝƚLJƌĞƋƵŝƌĞŵĞŶƚŽĨΨϭϱϬŵƚŚĂƚŬŝĐŬĞĚŝŶ:ƵůLJϭ ,ĂůĐŽŶZĞƐŽƵƌĐĞƐΎ KĐƚŽďĞƌ ĂƌŶŝŶŐƐĚĞĐůŝŶĞ >ŝŶŶ ŶĞƌŐLJ KĐƚŽďĞƌ ŝŵŝŶŝƐŚŝŶŐĨƌĞĞĐĂƐŚĨůŽǁ

ZĞĐĞŶƚĂŐůĞ&ŽƌĚĂƐƐĞƚƐĂůĞƐŝŐŶŝĨŝĐĂŶƚůLJƌĞĚƵĐĞƐ'ŽŽĚƌŝĐŚΖƐŚŝŐŚƋƵĂůŝƚLJ 'ŽŽĚƌŝĐŚWĞƚƌŽůĞƵŵ KĐƚŽďĞƌ ĂƐƐĞƚƐ͖ŽŶƚŝŶƵĞĚƉƌĞĨĞƌƌĞĚƐƚŽĐŬĚŝƐƚƌŝďƵƚŝŽŶƐĐŽƵůĚĚĞĐƌĞĂƐĞůŝƋƵŝĚŝƚLJ

^ĂŵƐŽŶZĞƐŽƵƌĐĞƐ EŽǀĞŵďĞƌ DŝŶŝŵƵŵůŝƋƵŝĚŝƚLJƌĞƋƵŝƌĞŵĞŶƚŽĨΨϭϱϬŵƚŚĂƚŬŝĐŬĞĚŝŶ:ƵůLJϭ

,ŝƌŝŶŐŽĨ>ĂnjĂƌĚƚŽĂĚǀŝƐĞŽŶĐĂƉƐƚƌƵĐƚƵƌĞ͕ĨŝŶĂŶĐŝŶŐĂůƚĞƌŶĂƚŝǀĞƐĂŶĚƌĞůĂƚĞĚ ^ǁŝĨƚŶĞƌŐLJ EŽǀĞŵďĞƌ ƐƚƌĂƚĞŐŝĐŽƉƉŽƌƚƵŶŝƚŝĞƐ͖ϮϬϭϳďŽŶĚŚŽůĚĞƌƐƚĂƉƉŝŶŐůĂĐŬƐƚŽŶĞĂƐ&

WĞŶŶsŝƌŐŝŶŝĂΎ EŽǀĞŵďĞƌ ŽǀĞŶĂŶƚŽŵƉůŝĂŶĐĞ͖ >ŝƋƵŝĚŝƚLJĚƌĂŝŶ͘ ůƚĂDĞƐĂ ,ŽůĚŝŶŐƐΎ EŽǀĞŵďĞƌ >ŝƋƵŝĚŝƚLJĐƌƵŶĐŚ ŝŶϮϬϭϲ ŶĞƌŐLJyy/ ĞĐĞŵďĞƌ >ŝƋƵŝĚŝƚLJĐƌƵŶĐŚ ŝŶϮϬϭϲ

^ŽƵƌĐĞ͗ĞďƚǁŝƌĞΘWZĞƐƚƌƵĐƚƵƌŝŶŐZŽƵůĞƚƚĞdĂďůĞ Ύ,ĂƐŽƉĞƌĂƚŝŽŶƐŝŶDĂƌĐĞůůƵƐĂŶĚͬŽƌhƚŝĐĂƐŚĂůĞƉůĂLJƐ

ϴ

^ŚĂůĞWůĂLJ/ŵƉĂĐƚ ƒ dŚĞƐƚĞĞƉƉƌŽĚƵĐƚŝŽŶĚĞĐůŝŶĞĐƵƌǀĞƐŽĨŽƌĚŝŶĂƌLJ ƐŚĂůĞǁĞůůƐƌĞƋƵŝƌĞƐĞΘƉĐŽŵƉĂŶŝĞƐƚŽĐŽŶƐƚĂŶƚůLJ ĚƌŝůůŶĞǁǁĞůůƐƚŽƐƵƐƚĂŝŶŽƌŝŶĐƌĞĂƐĞƌĞǀĞŶƵĞ͘ ƒ 'ŝǀĞŶƚŚĞƌĞĚƵĐƚŝŽŶƐŝŶůŝƋƵŝĚŝƚLJĂŶĚƌĞƐƵůƚŝŶŐ ƌĞĚƵĐƚŝŽŶƐŝŶĐĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐĂŶĚĚƌŝůůŝŶŐ ƉƌŽŐƌĂŵƐ͕ƐŚĂůĞƉůĂLJƐŵĂLJƐĞĞĂŵƉůŝĨŝĞĚĚĂŵĂŐĞ ĂƐƚŚĞĞΘƉĐŽŵƉĂŶŝĞƐĐĂŶŶŽƚŵĂŝŶƚĂŝŶĞĂƌŶŝŶŐƐ ǁŝƚŚŽƵƚĐŽŶƐƚĂŶƚĚƌŝůůŝŶŐ͘ ƒ /ŵƉĂĐƚǁŝƚŚƚƌŝĐŬůĞĚŽǁŶƚŽƚŚĞ ŽŝůĨŝĞůĚƐĞƌǀŝĐĞƐƐĞĐƚŽƌĂŶĚŽƚŚĞƌ ƌĞůĂƚĞĚŝŶĚƵƐƚƌLJǀĞƌƚŝĐĂůƐ͘

4 8/28/2015

ϵ

ZĂŝƐŝŶŐĂƉŝƚĂůƚŽĚĚƌĞƐƐ>ŝƋƵŝĚŝƚLJEĞĞĚƐ

ƒ ƐŵĞŶƚŝŽŶĞĚ͕ĞΘƉĐŽŵƉĂŶŝĞƐĂĐƚŝǀĞŝŶƐŚĂůĞƉůĂLJƐ ŶĞĞĚƚŽĂĐƚŝǀĞůLJĚƌŝůůƚŽŵĂŝŶƚĂŝŶĂŶĚĂƚƚĞŵƉƚƚŽ ŐƌŽǁƌĞǀĞŶƵĞ͕ĂŶĚŝŶƐŽŵĞĐĂƐĞƐƚŽĂǀŽŝĚĨŽƌĨĞŝƚƵƌĞ ŽĨůĞĂƐĞƐ͘ ƒ ƌŝůůŝŶŐĂĐƚŝǀŝƚLJĞƋƵĂƚĞƐƚŽŝŶĐƌĞĂƐĞĚĂĐƚŝǀŝƚLJŝŶƚŚĞ ƐĞƌǀŝĐĞƐƐĞĐƚŽƌ͘

ϭϬ

ZĂŝƐŝŶŐĂƉŝƚĂůƚŽĚĚƌĞƐƐ>ŝƋƵŝĚŝƚLJEĞĞĚƐ

ƒ dŽĨƵŶĚƚŚĞůĂƌŐĞĐĂƉŝƚĂůĐŽŵŵŝƚŵĞŶƚƐŶĞĞĚĞĚĨŽƌ ƚŚĞƚĞĐŚŶŽůŽŐLJͲŝŶƚĞŶƐŝǀĞĚƌŝůůŝŶŐƉƌŽŐƌĂŵƐŝŶŚĞƌĞŶƚ ƚŽƐŚĂůĞƉůĂLJƐ͕ĐŽŵƉĂŶŝĞƐŵƵƐƚƐĞĞŬĐĂƉŝƚĂůŝŶĨƵƐŝŽŶƐ ĨƌŽŵĂůƚĞƌŶĂƚŝǀĞŵĞĂŶƐ͕ŝŶĐůƵĚŝŶŐ͗ ƒ :ŽŝŶƚsĞŶƚƵƌĞƐ ƒ ^ĞĐŽŶĚ>ŝĞŶ&ŝŶĂŶĐŝŶŐƐ ƒ ĞďƚdžĐŚĂŶŐĞƐ ƒ WƌŽĚƵĐƚŝŽŶWĂLJŵĞŶƚƐ;ƌŽLJĂůƚLJƚƌƵƐƚƐ͕ƚĂŬŝŶŐƉƵďůŝĐ͕ ĞƚĐ͘Ϳ ƒ /WKƐ;ŵƵůƚŝƉůĞƐƚƌƵĐƚƵƌĞƐͿ

5 8/28/2015

ϭϭ

:ŽŝŶƚsĞŶƚƵƌĞƐ ƒ ^ĞǀĞƌĂů:sƐƚƌƵĐƚƵƌĞƐĂƌĞ ďĞŝŶŐƵƐĞĚƚŽƉƌŽǀŝĚĞĚƌŝůůŝŶŐ ĐĂƉŝƚĂůʹ ƐŽŵĞĂƌĞĚŝƐƚŝŶĐƚ ůĞŐĂůĞŶƚŝƚŝĞƐ͕ŽƚŚĞƌƐĂƌĞ ƵŶŝŶĐŽƌƉŽƌĂƚĞĚǀĞŶƚƵƌĞƐ ƒ dĂdžƚƌĞĂƚŵĞŶƚŽƉƚŝŽŶƐĨŽƌ:sƐ͗ ƒ :KƐƚLJƉŝĐĂůůLJĐƌĞĂƚĞĂ ƉĂƌƚŶĞƌƐŚŝƉĨŽƌƚĂdžƉƵƌƉŽƐĞƐ ƒ ĨĨĞĐƚƐŽĨƉĂƌƚŶĞƌƐŚŝƉƚĂdž ƚƌĞĂƚŵĞŶƚŽŶƚŚĞ͞ĐĂƌƌLJŝŶŐ͟ ĂŶĚ͞ĐĂƌƌŝĞĚ͟ƉĂƌƚŶĞƌ

ϭϮ

ƌŝůůŽ^ƚƌƵĐƚƵƌĞ ƒ EŽƚĂƐĞƉĂƌĂƚĞůĞŐĂůĞŶƚŝƚLJ ƒ /ŶǀĞƐƚŽƌƌĞĐĞŝǀĞƐĂǁŽƌŬŝŶŐŝŶƚĞƌĞƐƚŝŶŶĞǁǁĞůůƐ ĚƌŝůůĞĚĂŶĚĐŽŵƉůĞƚĞĚŽŶƚŚĞƐƵďũĞĐƚƉƌŽƉĞƌƚŝĞƐ ƒ /ŶƌĞƚƵƌŶ͕/ŶǀĞƐƚŽƌĨƵŶĚƐĂůůŽƌĂƐŝŐŶŝĨŝĐĂŶƚƉŽƌƚŝŽŶŽĨ ƚŚĞĚĞǀĞůŽƉŵĞŶƚĐŽƐƚƐŽĨĞĂĐŚǁĞůů ƒ KŶĐĞƚŚĞ/ŶǀĞƐƚŽƌƌĞĐĞŝǀĞƐĂƐƚĂƚĞĚ/ZZ͕ƐŽŵĞŽĨ /ŶǀĞƐƚŽƌƐt/Ɛ ƌĞǀĞƌƚďĂĐŬƚŽŽŵƉĂŶLJ ƒ ŽŵƉĂŶLJŝƐƚLJƉŝĐĂůůLJŽƉĞƌĂƚŽƌ ƒ ƌŝůůŝŶŐĂŶĚŽƉĞƌĂƚŝŶŐƉůĂŶĂŐƌĞĞĚƚŽ ďLJ/ŶǀĞƐƚŽƌ

6 8/28/2015

ϭϯ

ZĞĐĞŶƚƌŝůůŽdžĂŵƉůĞƐ

ƒ >ŝŶŶŶĞƌŐLJʹ '^K ;>K/ĞĐϮϬϭϰ͕^ŝŐŶĞĚ:ƵůLJϮϬϭϱͿ ƒ '^KĐŽŵŵŝƚƐΨϱϬϬŵŝůůŝŽŶƚŽĨƵŶĚϭϬϬйŽĨ>ŝŶŶ͛Ɛ ĚƌŝůůŝŶŐƉƌŽŐƌĂŵ ƒ /ŶŝƚŝĂůůLJ͕'^KŚĂƐϴϱйt/͕>ŝŶŶŚĂƐϭϱйĐĂƌƌŝĞĚt/ ƒ hƉŽŶ'^K͛ƐĂĐŚŝĞǀŝŶŐĂϭϱйĂŶŶƵĂůŝnjĞĚƌĞƚƵƌŶ͕'^K ǁŝůůŚĂǀĞϱйt/͕>ŝŶŶǁŝůůŚĂǀĞϵϱйt/

ϭϰ

ZĞĐĞŶƚƌŝůůŽdžĂŵƉůĞƐ;ĐŽŶ͛ƚͿ

ƒ >ĞŐĂĐLJʹ dW';^ŝŐŶĞĚ:ƵůLJϮϬϭϱͿ ƒ dW'ĐŽŵŵŝƚƐΨϭϱϬŵŝůůŝŽŶŝŶŝƚŝĂůůLJƚŽĨƵŶĚƉĂƌƚŽĨ>ĞŐĂĐLJ͛Ɛ ŚŽƌŝnjŽŶƚĂůĚƌŝůůŝŶŐƉƌŽŐƌĂŵŝŶƚŚĞWĞƌŵŝĂŶĂƐŝŶ ƒ dW'ŐĞƚƐĂŶϴϳ͘ϱйt/ŝŶƚŚĞƉƌŽƉĞƌƚŝĞƐ͕>ĞŐĂĐLJŬĞĞƉƐ ϭϮ͘ϱй ƒ dW'ĨƵŶĚƐϵϱйŽĨĚƌŝůůŝŶŐĐŽƐƚƐĂŶĚŐĞƚƐϴϳ͘ϱйt/ ʹ >ĞŐĂĐLJĨƵŶĚƐϱйŽĨĚƌŝůůŝŶŐƐĐŽƐƚƐĂŶĚƌĞƚĂŝŶƐĂϭϮ͘ϱй t/;ϳ͘ϱйĐĂƌƌŝĞĚt/Ϳ ƒ hƉŽŶƌĞĂĐŚŝŶŐĂϭdžZK/͕dW'ŚĂƐϲϯйt/ĂŶĚ>ĞŐĂĐLJŚĂƐ ϯϳйt/ ƒ hƉŽŶƌĞĂĐŚŝŶŐĂϭϱй/ZZ͕dW'ŚĂƐ ϭϱйt/͕>ĞŐĂĐLJŚĂƐϴϱйt/ĂŶĚĂůů ƵŶĚĞǀĞůŽƉĞĚŝŶƚĞƌĞƐƚƐƌĞǀĞƌƚƚŽ>ĞŐĂĐLJ

7 8/28/2015

ϭϱ

ZĞĐĞŶƚƌŝůůŽdžĂŵƉůĞƐ;ĐŽŶ͛ƚͿ

ƒ >ŽŶĞƐƚĂƌʹ /K' ;ůŽƐĞĚ:ƵůLJϮϬϭϱͿ ƒ /K'ĐŽŵŵŝƚƐΨϭϬϬŵŝůůŝŽŶƚŽĨƵŶĚ>ŽŶĞƐƚĂƌ͛Ɛ ŝŶĐƌĞŵĞŶƚĂůĚƌŝůůŝŶŐƉƌŽŐƌĂŵŝŶƚŚĞĂŐůĞ&ŽƌĚ ƒ &ƵŶĚƐŐŽƚŽǁĂƌĚƐŶĞǁ ǁĞůůƐŵĞĞƚŝŶŐŝŶǀĞƐƚŵĞŶƚ ĐƌŝƚĞƌŝĂ ƒ /ŶŝƚŝĂůůLJ͕/K'ŚĂƐϵϬйt/͕>ŽŶĞƐƚĂƌŚĂƐϭϬйt/ ƒ hƉŽŶ/K'͛ƐĂĐŚŝĞǀŝŶŐĐĞƌƚĂŝŶŝŶǀĞƐƚŽƌƌĞƚƵƌŶƐ͕ >ŽŶĞƐƚĂƌ͛Ɛt/ŝŶĐƌĞĂƐĞƐƚŽϵϬй

ϭϲ

ĐƋƵŝƐŝƚŝŽŶŽ^ƚƌƵĐƚƵƌĞ

ƒ ^ĞƉĂƌĂƚĞůĞŐĂůĞŶƚŝƚLJ ƒ /ŶǀĞƐƚŽƌĨƵŶĚƐƚŚĞĂĐƋƵŝƐŝƚŝŽŶŽĨƉƌŽƉĞƌƚŝĞƐĂŶĚƌĞĐĞŝǀĞƐ ĂůůŽƌƐƵďƐƚĂŶƚŝĂůůLJĂůůŽĨƚŚĞŝŶŝƚŝĂůĞƋƵŝƚLJŝŶƚŚĞŶĞǁ ĞŶƚŝƚLJ ƒ EĞǁĞŶƚŝƚLJŵĂLJŐĞƚZK&Z ŽŶĂĐƋƵŝƐŝƚŝŽŶƐ ƒ ŽŵƉĂŶLJŚĂƐĂĐŽůůĂƌĨŽƌŝƚƐŽǁŶƉĂƌƚŝĐŝƉĂƚŝŽŶŝŶ ĂĐƋƵŝƐŝƚŝŽŶ ƒ ĨƚĞƌ/ŶǀĞƐƚŽƌƌĞĐĞŝǀĞƐĂƐƚĂƚĞĚ/ZZ͕ĞƋƵŝƚLJƐƉůŝƚƐĂĚũƵƐƚĞĚ ƒ EĞǁĞŶƚŝƚLJŽƉĞƌĂƚĞƐĂŶĚƌĞĐĞŝǀĞƐ ĂŵĂŶĂŐĞŵĞŶƚĨĞĞ

8 8/28/2015

ϭϳ

ZĞĐĞŶƚĐƋƵŝƐŝƚŝŽŶŽdžĂŵƉůĞ

ƒ >ŝŶŶŶĞƌŐLJʹ YƵĂŶƚƵŵ ;>K/DĂƌĐŚϮϬϭϱ͕^ŝŐŶĞĚ:ƵůLJϮϬϭϱͿ ƒ YƵĂŶƚƵŵĐŽŵŵŝƚƐΨϭďŝůůŝŽŶƚŽĨƵŶĚƚĂƌŐĞƚĞĚ ĂĐƋƵŝƐŝƚŝŽŶƐƚŚƌŽƵŐŚĂŶĐƋŽŵĂŶĂŐĞĚďLJ>ŝŶŶ ƒ >ŝŶŶĐĂŶƉĂƌƚŝĐŝƉĂƚĞǁŝƚŚĂt/ŽĨϭϱͲϱϬйŝŶĞĂĐŚ ĂĐƋƵŝƐŝƚŝŽŶ ƒ hƉŽŶYƵĂŶƚƵŵ͛ƐĂĐŚŝĞǀŝŶŐĐĞƌƚĂŝŶŝŶǀĞƐƚŽƌƌĞƚƵƌŶƐ͕ >ŝŶŶĐĂŶĞĂƌŶĂƉƌŽŵŽƚĞĚŝŶƚĞƌĞƐƚŝŶĐƋŽ

ϭϴ

^ĞĐŽŶĚ>ŝĞŶ&ŝŶĂŶĐŝŶŐƐ

ƒ ĞďƚƚŚĂƚĐŽŵĞƐŝŶĂďŽǀĞŚŝŐŚLJŝĞůĚƵŶƐĞĐƵƌĞĚ ďŽŶĚƐĂŶĚďĞůŽǁĨŝƌƐƚůŝĞŶƐĞĐƵƌĞĚĚĞďƚ ƒ dLJƉŝĐĂů,zďŽŶĚŝŶĚĞŶƚƵƌĞƐŚĂǀĞƉĞƌŵŝƚƚĞĚůŝĞŶ ďĂƐŬĞƚƐƚŚĂƚĂůůŽǁĨŽƌƉƌŝŵŝŶŐƐĞĐŽŶĚůŝĞŶĚĞďƚ ƒ &ŝƌƐƚůŝĞŶůĞŶĚĞƌƐĂůůŽǁƚŚĞĂĚĚŝƚŝŽŶĂůĚĞďƚƉƌŽǀŝĚĞĚ ĂƉŽƌƚŝŽŶƵƐĞĚƚŽƉĂLJĚŽǁŶĨĂĐŝůŝƚLJ ƒ 'ŝǀĞƐŝŶǀĞƐƚŽƌŝŶƚĞƌĞƐƚŝŶĐŽůůĂƚĞƌĂů

9 8/28/2015

ϭϵ

^ĞĐŽŶĚ>ŝĞŶ&ŝŶĂŶĐŝŶŐƐ;ĐŽŶ͛ƚͿ

ƒ ŽĞƐŶ͛ƚƐŽůǀĞƚŚĞĐŽŵƉĂŶLJ͛ƐƉƌŽďůĞŵŽĨďĞŝŶŐ ŽǀĞƌůĞǀĞƌĞĚŝŶĚĞƉƌĞƐƐĞĚĐŽŵŵŽĚŝƚŝĞƐƉƌŝĐĞƐ ƒ ƌĞĂƚĞƐŝƐƐƵĞƐǁŝƚŚƵŶƐĞĐƵƌĞĚ,zďŽŶĚŚŽůĚĞƌƐ ƒ DĂŶLJΘWĐŽŵƉĂŶŝĞƐŚĂǀĞƐŝŐŶŝĨŝĐĂŶƚĂŵŽƵŶƚƐŽĨ,z ďŽŶĚƐŵĂƚƵƌŝŶŐŝŶƚŚĞŶĞdžƚƐĞǀĞƌĂůLJĞĂƌƐ ƒ ZĞĐĞŶƚƐĞĐŽŶĚůŝĞŶĨŝŶĂŶĐŝŶŐƐ͗ ƒ ΀<ŝƚƚŽŝŶƐĞƌƚĞdžĂŵƉůĞƐ΁

ϮϬ

ĞďƚdžĐŚĂŶŐĞƐ

ƒ ƐŶŽƚĞĚ͕ŵĂŶLJΘWĐŽŵƉĂŶŝĞƐŚĂǀĞ,zďŽŶĚƐ ŵĂƚƵƌŝŶŐŝŶƚŚĞŶĞdžƚƐĞǀĞƌĂůLJĞĂƌƐ ƒ >ĂƵŶĐŚƚĞŶĚĞƌĂŶĚĞdžĐŚĂŶŐĞŽĨĨĞƌƚŽƉƵƐŚŽƵƚ ŵĂƚƵƌŝƚŝĞƐ ƒ ,ŝŐŚĞƌĐŽƵƉŽŶƐ͕ĐĂƐŚĐŽŶƐŝĚĞƌĂƚŝŽŶ ƒ ŽƵůĚŝŶĐƌĞĂƐĞŽǀĞƌĂůůĚĞďƚƐĞƌǀŝĐĞ ƒ WƌŽĐĞĞĚƐƵƐĞĚƚŽƉĂLJĚŽǁŶĨĂĐŝůŝƚLJŝŶĂĚǀĂŶĐĞŽĨ ƌĞĚĞƚĞƌŵŝŶĂƚŝŽŶŝŶƐƚĞĂĚŽĨǁŽƌŬŝŶŐĐĂƉŝƚĂů

10 8/28/2015

Ϯϭ sĂƌŝŽƵƐWƌŽƉĞƌƚLJ/ŶƚĞƌĞƐƚƐ

ϮϮ

ZŽLJĂůƚLJ/ŶƚĞƌĞƐƚ

ƒ ZŽLJĂůƚLJ/ŶƚĞƌĞƐƚʹ ƌĞĂůƉƌŽƉĞƌƚLJŝŶƚĞƌĞƐƚĞŶƚŝƚůŝŶŐƚŚĞ ŝŶƚĞƌĞƐƚŚŽůĚĞƌƚŽĂƐŚĂƌĞŽĨƌĞǀĞŶƵĞĨƌŽŵ ƉƌŽĚƵĐƚŝŽŶǁŝƚŚŽƵƚďĞĂƌŝŶŐƚŚĞĐŽƐƚƐŽĨĞdžƉůŽƌĂƚŝŽŶ ĂŶĚƉƌŽĚƵĐƚŝŽŶ ƒ dLJƉĞƐ ƒ KǀĞƌƌŝĚŝŶŐZŽLJĂůƚLJ/ŶƚĞƌĞƐƚƐ;KZZ/ƐͿ ƒ WƌŽĚƵĐƚŝŽŶWĂLJŵĞŶƚƐ ʹ sWWƐ ʹ DWWƐ

11 8/28/2015

Ϯϯ dLJƉĞƐŽĨZŽLJĂůƚLJ/ŶƚĞƌĞƐƚƐ ƒ KZZ/Ͳ KǀĞƌƌŝĚŝŶŐZŽLJĂůƚLJ/ŶƚĞƌĞƐƚ ƒ ,ŽůĚĞƌĞŶƚŝƚůĞĚƚŽĂƉĞƌĐĞŶƚĂŐĞŽĨƉƌŽĐĞĞĚƐĨƌŽŵƚŚĞ ƐĂůĞŽĨŽŝůΘŐĂƐƉƌŽĚƵĐĞĚĨƌŽŵĂůĞĂƐĞŽƌǁĞůů ƒ dLJƉŝĐĂůůLJƐƵƌǀŝǀĞƐĨŽƌƚŚĞůŝĨĞŽĨƚŚĞůĞĂƐĞŽƌǁĞůů͕ďƵƚ ĐĂŶďĞĂƚĞƌŵƌŽLJĂůƚLJ ƒ >ŽǁŽŝůƉƌŝĐĞƐĚĞǀĂůƵĞKZZ/ƐƐŝŶĐĞƉƌŽĚƵĐƚŝŽŶŝƐůĞƐƐ ǀĂůƵĂďůĞ ƒ ƐŽŝůƉƌŝĐĞƐƌŝƐĞ͕KZZ/ƐĂƌĞŵŽƌĞǀĂůƵĂďůĞ͕ƉŽƐƐŝďůLJ ĞŶĂďůŝŶŐŝŶǀĞƐƚŽƌƐƚŽŵŽŶĞƚŝnjĞƉƌŝŽƌ ƚŽƚŚĞĞŶĚŽĨƚŚĞƉƌŽĚƵĐƚŝǀĞůŝĨĞŽĨ ƚŚĞĂƐƐĞƚŽƌĞdžƉŝƌĂƚŝŽŶŽĨƚŚĞƚĞƌŵ

Ϯϰ dLJƉĞƐŽĨZŽLJĂůƚLJ/ŶƚĞƌĞƐƚƐ

ƒ sWWƐʹ sŽůƵŵĞƚƌŝĐWƌŽĚƵĐƚŝŽŶWĂLJŵĞŶƚƐ ƒ ,ŽůĚĞƌĞŶƚŝƚůĞĚƚŽĂƐƉĞĐŝĨŝĐǀŽůƵŵĞŽĨƉƌŽĚƵĐƚŝŽŶ;Žƌ ƉƌŽĐĞĞĚƐĨƌŽŵƚŚĂƚǀŽůƵŵĞͿ ƒ sĂůƵĞŝƐůŝŶŬĞĚƚŽŽŝůƉƌŝĐĞƐ͕ƐŝŵŝůĂƌƚŽKZZ/ ƒ DWWƐʹ DŽŶĞƚĂƌLJWƌŽĚƵĐƚŝŽŶWĂLJŵĞŶƚƐ ƒ ,ŽůĚĞƌĞŶƚŝƚůĞĚƚŽĂĨŝdžĞĚΨĂŵŽƵŶƚŐĞŶĞƌĂƚĞĚĨƌŽŵ ƉƌŽĚƵĐƚŝŽŶ ƒ >ŽǁŽŝůƉƌŝĐĞƐŵĞĂŶĂůĂƌŐĞƌǀŽůƵŵĞ ŽĨƉƌŽĚƵĐƚŝŽŶŝƐƌĞƋƵŝƌĞĚƚŽŵĞĞƚ ƚŚĞƌĞƚƵƌŶ

12 8/28/2015

Ϯϱ

ĞŶĞĨŝƚƐƚŽŽŵƉĂŶŝĞƐ

ƒ WƌŽǀŝĚĞĚĞǀĞůŽƉŵĞŶƚĐĂƉŝƚĂů ƒ DĂŝŶƚĂŝŶĚƌŝůůŝŶŐƉƌŽŐƌĂŵƐ ƒ ŽŵƉůLJǁŝƚŚůĞĂƐĞƐĂŶĚĂǀŽŝĚ ĨŽƌĨĞŝƚƵƌĞĚƵĞƚŽůĂĐŬŽĨ ĚƌŝůůŝŶŐ ƒ WƌŽǀŝĚĞĂĚĚŝƚŝŽŶĂůƌĞǀĞŶƵĞ ƐƚƌĞĂŵƐ ƒ ƚƚƌĂĐƚͬƌĞƚĂŝŶƚĂůĞŶƚ ƒ ZĞƚĂŝŶŽǁŶĞƌƐŚŝƉŽĨĂƐƐĞƚƐ ƒ >ŽŶŐƚĞƌŵƵƉƐŝĚĞ

Ϯϲ

ĞŶĞĨŝƚƐƚŽ/ŶǀĞƐƚŽƌƐ

ƒ ZĞĂůWƌŽƉĞƌƚLJ/ŶƚĞƌĞƐƚ ƒ ZĞĂůƉƌŽƉĞƌƚLJŝŶƚĞƌĞƐƚƐĞdžĐůƵĚĞĚĨƌŽŵƉƌŽƉĞƌƚLJŽĨƚŚĞ ĞƐƚĂƚĞĂŶĚĐĂŶŶŽƚďĞƐŽůĚĂƐĂŶĂƐƐĞƚŽƌƌĞũĞĐƚĞĚĂƐĂŶ ĞdžĞĐƵƚŽƌLJĐŽŶƚƌĂĐƚ ƒ dŚĞďĂŶŬƌƵƉƚĐLJĐŽĚĞƉƌŽǀŝĚĞƐĂƐĂĨĞŚĂƌďŽƌĨŽƌŝŶǀĞƐƚŽƌƐ ŝŶƉƌŽĚƵĐƚŝŽŶƉĂLJŵĞŶƚƐďLJĞdžĐůƵĚŝŶŐƚŚĞƐĞĨƌŽŵƚŚĞ ƉƌŽƉĞƌƚLJŽĨƚŚĞĞƐƚĂƚĞ͕ƉƌŽǀŝĚĞĚƚŚĂƚƚŚĞŝŶǀĞƐƚŽƌĚŽĞƐŶŽƚ ͞ƉĂƌƚŝĐŝƉĂƚĞŝŶƚŚĞŽƉĞƌĂƚŝŽŶŽĨƚŚĞƉƌŽƉĞƌƚLJ͟ ƒ >ĂǁŝƐƌĞůĂƚŝǀĞůLJƵŶƚĞƐƚĞĚĂƐƚŽƐĐŽƉĞĂŶĚĨƵůů ŵĞĂŶŝŶŐŽĨƌĞƋƵŝƌĞŵĞŶƚƚŚĂƚŝŶǀĞƐƚŽƌŵƵƐƚ ŶŽƚ͞ƉĂƌƚŝĐŝƉĂƚĞŝŶƚŚĞŽƉĞƌĂƚŝŽŶŽĨ ƚŚĞƉƌŽƉĞƌƚLJ͟

13 8/28/2015

Ϯϳ

ĞŶĞĨŝƚƐƚŽ/ŶǀĞƐƚŽƌƐ

ƒ &ůĞdžŝďůĞƐƚƌƵĐƚƵƌĞ ƒ WŽƚĞŶƚŝĂůŽǀĞƌƐŝŐŚƚŽĨĚƌŝůůŝŶŐƉƌŽŐƌĂŵƐĂŶĚĂďŝůŝƚLJƚŽ ƚĂƌŐĞƚƐƉĞĐŝĨŝĐĂƐƐĞƚƐ ƒ DƵƐƚďĞŶĞŐŽƚŝĂƚĞĚďĞĐĂƵƐĞƌŽLJĂůƚLJŝŶƚĞƌĞƐƚƐĚŽŶŽƚ ĞŶƚŝƚůĞŝŶǀĞƐƚŽƌƐƚŽŽƉĞƌĂƚŝŽŶĂůƌŝŐŚƚƐďLJĚĞĨĂƵůƚ ƒ ^ƚĞĞƌĨƵŶĚƐƚŽďĞƚƚĞƌĚƌŝůůŝŶŐůŽĐĂƚŝŽŶƐ ƒ /ŶƉƵƚŽŶĐŽŵŵĞƌĐŝĂůͬŽƉĞƌĂƚŝŽŶĂůĚĞĐŝƐŝŽŶƐ͕ ĐŽŶƚƌĂĐƚƵĂůƚĞƌŵƐǁŝƚŚƚŚŝƌĚƉĂƌƚŝĞƐ

Ϯϴ

ŽŵŵŽŶƚLJƉĞƐŽĨŽǁŶĞƌƐŚŝƉ

dLJƉĞ ŚĂƌĂĐƚĞƌŝƐƚŝĐƐ dĞƌŵ tŽƌŬŝŶŐ Ź 'ƌĂŶƚĞĚ ďLJŽǁŶĞƌŽĨŵŝŶĞƌĂůŝŶƚĞƌĞƐƚ ŽŶƚŝŶƵĞƐ ƚŚƌŽƵŐŚ ŝŶƚĞƌĞƐƚ Ź ŶƚŝƚůĞƐŚŽůĚĞƌƚŽƐŚĂƌĞŽĨƉƌŽĚƵĐƚŝŽŶ ƉƌŽĚƵĐƚŝŽŶŽƌĂ Ź ĞĂƌƐĂůůĚĞǀĞůŽƉŵĞŶƚĂŶĚŽƉĞƌĂƚŝŶŐĐŽƐƚƐ ƐƉĞĐŝĨŝĞĚƚĞƌŵ Ź /ŶƚĂŶŐŝďůĞĚƌŝůůŝŶŐĐŽƐƚĂŶĚĚĞƉůĞƚŝŽŶĚĞĚƵĐƚŝŽŶƐ ZŽLJĂůƚLJ Ź ZĞƚĂŝŶĞĚďLJŽǁŶĞƌŽĨŵŝŶĞƌĂůŽƌĨĞĞŝŶƚĞƌĞƐƚǁŚĞŶ WĞƌƉĞƚƵĂů ůĞĂƐŝŶŐŽƉĞƌĂƚŝŶŐƌŝŐŚƚƐƚŽĂŶŽƚŚĞƌ ƉĂƌƚLJ Ź ŶƚŝƚůĞƐŚŽůĚĞƌƚŽƌĞĐĞŝǀĞƐŚĂƌĞŽĨŐƌŽƐƐŝŶĐŽŵĞŽƌ ƉƌŽĚƵĐƚŝŽŶĨƌŽŵŵŝŶĞƌĂůŝŶƚĞƌĞƐƚ;ŶĞƚŽĨ ƉƌŽĚƵĐƚŝŽŶͬƐĞǀĞƌĂŶĐĞƚĂdžͿ Ź ŽĞƐŶŽƚďĞĂƌĚĞǀĞůŽƉŵĞŶƚŽƌŽƉĞƌĂƚŝŶŐĐŽƐƚƐ Ź ĞƉůĞƚŝŽŶĚĞĚƵĐƚŝŽŶƐ KǀĞƌƌŝĚŝŶŐ Ź ĂƌǀĞĚŽƵƚŽĨŽƉĞƌĂƚŝŶŐŝŶƚĞƌĞƐƚ >ŝŶŬĞĚ ƚŽƚĞƌŵŽĨ ƌŽLJĂůƚLJ Ź KƚŚĞƌǁŝƐĞ͕ƐŝŵŝůĂƌĐŚĂƌĂĐƚĞƌŝƐƚŝĐƐ ĂƐƌŽLJĂůƚLJ ŽƉĞƌĂƚŝŶŐŝŶƚĞƌĞƐƚ WƌŽĚƵĐƚŝŽŶ Ź ZŝŐŚƚƚŽƌĞĐĞŝǀĞ ĂƐƉĞĐŝĨŝĞĚƐŚĂƌĞŽĨŐƌŽƐƐ ƵƌĂƚŝŽŶŝƐƐŚŽƌƚĞƌ ƉĂLJŵĞŶƚ ƉƌŽĚƵĐƚŝŽŶĨƌŽŵĂŵŝŶĞƌĂůƉƌŽƉĞƌƚLJ ƚŚĂŶŝŶƚĞƌĞƐƚĨƌŽŵ Ź >ŝŵŝƚĞĚŝŶƋƵĂŶƚƵŵ͕;Ğ͘Ő͕͘ĚŽůůĂƌ͕ƚŝŵĞŽƌǀŽůƵŵĞͿ ǁŚŝĐŚŝƚŝƐĚĞƌŝǀĞĚ Ź ŽŵŵŽŶůLJƚƌĞĂƚĞĚĂƐĚĞďƚĨŽƌƚĂdžƉƵƌƉŽƐĞƐ ;ǁŝƚŚĐĞƌƚĂŝŶĞdžĐĞƉƚŝŽŶƐͿ Ź /ĨƚƌĞĂƚĞĚĂƐĚĞďƚ͕ŶŽƚĞŶƚŝƚůĞĚƚŽĚĞƉůĞƚŝŽŶ EĞƚƉƌŽĨŝƚƐ Ź ŶƚŝƚůĞĚƚŽƐŚĂƌĞŽĨŐƌŽƐƐƉƌŽĚƵĐƚŝŽŶ͕ ŶĞƚŽĨ DĂLJďĞƉĞƌƉĞƚƵĂůŽƌ ŝŶƚĞƌĞƐƚ ŽƉĞƌĂƚŝŶŐ;ĂŶĚƐŽŵĞƚŝŵĞƐĚĞǀĞůŽƉŵĞŶƚͿĐŽƐƚƐ ůŝŵŝƚĞĚ͕ ĚĞƉĞŶĚŝŶŐ Ź EŽƚĚŝƌĞĐƚůLJůŝĂďůĞ ĨŽƌƉĂLJŵĞŶƚŽĨĐŽƐƚƐ ŽŶŝŶƐƚƌƵŵĞŶƚ Ź ĞƉůĞƚŝŽŶĚĞĚƵĐƚŝŽŶƐ

14 8/28/2015

Ϯϵ

KǀĞƌǀŝĞǁ

ŽƌƉŽƌĂƚŝŽŶƐ D>WƐ

hƉͲ zŝĞůĚĐŽƐ

ϯϬ

ŽƌƉŽƌĂƚŝŽŶƐ ƚƌĂĚŝƚŝŽŶĂůĐŽƌƉŽƌĂƚĞ/WKŝƐƚŚĞŵŽƐƚĐŽŵŵŽŶĂŶĚǁĞůůͲŬŶŽǁŶĨŽƌŵŽĨ ĂĐĐĞƐƐŝŶŐƉƵďůŝĐĐĂƉŝƚĂů͘

ƒ dŚĞƚƌĂĚŝƚŝŽŶĂůĐŽƌƉŽƌĂƚĞƐƚƌƵĐƚƵƌĞŐĞŶĞƌĂůůLJƌĞƐƵůƚƐ ,ŝƐƚŽƌŝĐ WƵďůŝĐ ŝŶƚǁŽůĞǀĞůƐŽĨƚĂdž;ĚŽƵďůĞƚĂdžĂƚŝŽŶͿʹ ƚŚĞƉƵďůŝĐ ^ŚĂƌĞŚŽůĚĞƌƐ ĐŽƌƉŽƌĂƚŝŽŶƉĂLJƐƚĂdžŽŶŝƚƐĞĂƌŶŝŶŐƐ͕ĂŶĚƚŚĞ ƐŚĂƌĞŚŽůĚĞƌƐŐĞŶĞƌĂůůLJƉĂLJƚĂdžŽŶĚŝƐƚƌŝďƵƚŝŽŶƐ ϭϬϬͲyй yй ƌĞĐĞŝǀĞĚĨƌŽŵƚŚĞƉƵďůŝĐĐŽƌƉŽƌĂƚŝŽŶ͘ ƒ tĞůůƌĞĐŽŐŶŝnjĞĚĂŶĚĂĐĐĞƉƚĞĚŝŶƚŚĞƉƵďůŝĐŵĂƌŬĞƚ͘ WƵďůŝĐ ŽŵƉĂŶLJ ƒ ,ŝƐƚŽƌŝĐĂůůLJ͕ĂĚĞƐŝƌĂďůĞĨŽƌŵŽĨĂĐĐĞƐƐŝŶŐƉƵďůŝĐ ĐĂƉŝƚĂůĨŽƌĂǀĂƌŝĞƚLJŽĨƌĞĂƐŽŶƐͬĐŝƌĐƵŵƐƚĂŶĐĞƐ͗ ƒ /ŶƐƵĨĨŝĐŝĞŶƚƋƵĂůŝĨLJŝŶŐŝŶĐŽŵĞʹ ƚƌĂĚŝƚŝŽŶĂůƉƵďůŝĐ

ĐŽŵƉĂŶLJŝƐŶŽƚƐƵďũĞĐƚƚŽĂŶLJƋƵĂůŝĨLJŝŶŐŝŶĐŽŵĞŽƌ KƉĞƌĂƚŝŶŐ ƋƵĂůŝĨLJŝŶŐĂƐƐĞƚƚĞƐƚƐ͖ůŽŶŐͲƚĞƌŵĐĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞ ^ƵďƐŝĚŝĂƌŝĞƐ ŶĞĞĚƐ͖ĚĞƐŝƌĞƚŽƌĞŝŶǀĞƐƚŽƌŐƌŽǁƚŚƌŽƵŐŚ ĂĐƋƵŝƐŝƚŝŽŶ͕ĂƐŽƉƉŽƐĞĚƚŽĚŝƐƚƌŝďƵƚŝŶŐŽƵƚƉƌŽĨŝƚƐ ƒ 'ůŽďĂůŝŶǀĞƐƚŽƌďĂƐĞ ƒ sĂůƵĞďĂƐĞĚŽŶƉƌŽƐƉĞĐƚŝǀĞĞĂƌŶŝŶŐƐŐƌŽǁƚŚ ;ĂƐŽƉƉŽƐĞĚƚŽĂĐĂƐŚLJŝĞůĚͲďĂƐĞĚǀĂůƵĂƚŝŽŶͿ

15 8/28/2015

ϯϭ

DĂƐƚĞƌ>ŝŵŝƚĞĚWĂƌƚŶĞƌƐŚŝƉƐ

ŵĂƐƚĞƌůŝŵŝƚĞĚƉĂƌƚŶĞƌƐŚŝƉ;͞D>W͟ͿŝƐĂƉĂƌƚŶĞƌƐŚŝƉŽƌůŝŵŝƚĞĚůŝĂďŝůŝƚLJĐŽŵƉĂŶLJ ƚŚĂƚŝƐƚƌĂĚĞĚŽŶĂƐƚŽĐŬĞdžĐŚĂŶŐĞ͘ dzW/>D>WKZ'E/d/KE>^dZhdhZ ƒ /ŶĐŽŶƚƌĂƐƚƚŽĐŽƌƉŽƌĂƚŝŽŶƐ͕ƉĂƌƚŶĞƌƐŚŝƉƐ ^ƉŽŶƐŽƌ WƵďůŝĐ ŐĞŶĞƌĂůůLJĚŽŶŽƚƉĂLJĨĞĚĞƌĂůŝŶĐŽŵĞƚĂdžĂƚƚŚĞ ĞŶƚŝƚLJůĞǀĞů͖ŚŽǁĞǀĞƌ͕ƉƵďůŝĐůLJƚƌĂĚĞĚ ƉĂƌƚŶĞƌƐŚŝƉƐĂƌĞƚĂdžĞĚĂƐĐŽƌƉŽƌĂƚŝŽŶƐƵŶůĞƐƐ 'WϮйͬ>ͬ/ZƐ >W ϵϬйŽĨƚŚĞŐƌŽƐƐŝŶĐŽŵĞŝƐ͞ƋƵĂůŝĨLJŝŶŐŝŶĐŽŵĞ͟ ;ƚŚĞ͞YƵĂůŝĨLJŝŶŐ/ŶĐŽŵĞdĞƐƚ͟Ϳ͘ >W ƒ dŚĞŵŽƐƚƉƌŽŵŝŶĞŶƚĐĂƚĞŐŽƌLJŽĨƋƵĂůŝĨLJŝŶŐ ŝŶĐŽŵĞƌĞůĂƚĞƐƚŽŶĂƚƵƌĂůƌĞƐŽƵƌĐĞƐĂĐƚŝǀŝƚŝĞƐ͘ ϭϬϬй

ƒ ŽŶƐŝĚĞƌŶĞǁƉƌŽƉŽƐĞĚƌĞŐƵůĂƚŝŽŶƐŽŶ >> >ĞŶĚĞƌƐ ͞ƋƵĂůŝĨLJŝŶŐŝŶĐŽŵĞ͟ ƒ ŽŶƐŝĚĞƌ͞ǀĂƌŝĂďůĞƉĂLJ͟D>WƐ ĂƐĂŶĂůƚĞƌŶĂƚŝǀĞ ƐƐĞƚƐ

ϯϮ

DĂƐƚĞƌ>ŝŵŝƚĞĚWĂƌƚŶĞƌƐŚŝƉƐ ŝƐƚƌŝďƵƚŝŽŶŚĂƌĂĐƚĞƌŝƐƚŝĐƐ ƒ D>WƐ ƚLJƉŝĐĂůůLJƉĂLJŽƵƚĂůůŽĨƚŚĞŝƌ͞ĂǀĂŝůĂďůĞĐĂƐŚ͟;ĞƐƐĞŶƚŝĂůůLJĐĂƐŚƌĞĐĞŝƉƚƐůĞƐƐĐĂƐŚ ĞdžƉĞŶƐĞƐĂŶĚƌĞƐĞƌǀĞƐͿŽŶĂƋƵĂƌƚĞƌůLJďĂƐŝƐ;ƉĂƌƚŶĞƌƐŚŝƉĂŐƌĞĞŵĞŶƚƌĞƋƵŝƌĞŵĞŶƚ͖ŶŽƚůĞŐĂů ƌĞƋƵŝƌĞŵĞŶƚͿ͘ ƒ KŶĞŽĨƚŚĞŚĂůůŵĂƌŬƐŽĨƚŚĞƚƌĂĚŝƚŝŽŶĂůD>W ŚĂƐďĞĞŶƚŚĞƌĞůĂƚŝǀĞƐƚĂďŝůŝƚLJŝŶŝƚƐƋƵĂƌƚĞƌůLJ ĚŝƐƚƌŝďƵƚŝŽŶƉĂLJŵĞŶƚƐ͖ƚŚĞƉƌŝŵĂƌLJŐŽĂůŽĨŵŽƐƚD>WƐ ŚĂƐďĞĞŶƚŽŵĂŝŶƚĂŝŶŽƌŐƌŽǁ ĚŝƐƚƌŝďƵƚŝŽŶƐĞǀĞƌLJƋƵĂƌƚĞƌ͕ǁŝƚŚĂŶLJĚĞĐƌĞĂƐĞŝŶƋƵĂƌƚĞƌůLJĚŝƐƚƌŝďƵƚŝŽŶƐƚLJƉŝĐĂůůLJƉĞƌĐĞŝǀĞĚ ŶĞŐĂƚŝǀĞůLJďLJƚŚĞŵĂƌŬĞƚ͘ ƒ dLJƉŝĐĂůůLJ͕ŚĂůĨŽĨƚŚĞ>WŝŶƚĞƌĞƐƚƐĂƌĞƐƵďŽƌĚŝŶĂƚĞĚƵŶŝƚƐƌĞƚĂŝŶĞĚďLJƚŚĞƐƉŽŶƐŽƌ͘ƵƌŝŶŐƚŚĞ ƐƵďŽƌĚŝŶĂƚŝŽŶƉĞƌŝŽĚ;ƚLJƉŝĐĂůůLJϯLJĞĂƌƐͿ͕ƚŚĞƐƵďŽƌĚŝŶĂƚĞĚƵŶŝƚƐĚŽŶŽƚƌĞĐĞŝǀĞĚŝƐƚƌŝďƵƚŝŽŶƐ ƵŶƚŝůƚŚĞĐŽŵŵŽŶƵŶŝƚƐƌĞĐĞŝǀĞƚŚĞDY͘ ƒ dŚĞƐƉŽŶƐŽƌƌĞƚĂŝŶƐŝŶĐĞŶƚŝǀĞĚŝƐƚƌŝďƵƚŝŽŶƌŝŐŚƚƐ;/ZƐͿƚŚĂƚƌĞĐĞŝǀĞĂŶŝŶĐƌĞĂƐŝŶŐƉĞƌĐĞŶƚĂŐĞ ;ƚLJƉŝĐĂůůLJϭϯй͕ϮϯйĂŶĚϰϴйͿŽĨĚŝƐƚƌŝďƵƚŝŽŶƐĂĨƚĞƌƚŚĞDY ĂŶĚĐĞƌƚĂŝŶƚĂƌŐĞƚĚŝƐƚƌŝďƵƚŝŽŶ ůĞǀĞůƐŚĂǀĞďĞĞŶƐĂƚŝƐĨŝĞĚ͘ ƒ dŚĞĐůĂƐƐŝĐD>W ŝƐĂƉŝƉĞůŝŶĞĐŽŵƉĂŶLJǁŝƚŚůŽŶŐͲƚĞƌŵƚƌĂŶƐƉŽƌƚĂƚŝŽŶ ĂŐƌĞĞŵĞŶƚƐĂŶĚůŽǁĐĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐ͕ǁŚŝĐŚƉƌŽǀŝĚĞƐĨŽƌƐƚĂďůĞƚŽ ŝŶĐƌĞĂƐŝŶŐĐĂƐŚĚŝƐƚƌŝďƵƚŝŽŶƐŽǀĞƌƚŝŵĞ ƒ D>WƐ ŚĂǀĞŚŝƐƚŽƌŝĐĂůůLJŵĂŶĂŐĞĚĐĂƐŚĨůŽǁƐƚŚƌŽƵŐŚ͗ ;ϭͿĚŝƐƚƌŝďƵƚŝŽŶĐŽǀĞƌĂŐĞ͕;ϮͿůŽŶŐͲƚĞƌŵĐŽŶƚƌĂĐƚƐĂŶĚ;ϯͿŚĞĚŐŝŶŐ

16 8/28/2015

ϯϯ zŝĞůĚĐŽ

zŝĞůĚĐŽ ŽǁŶƐĂƐƐĞƚƐ͕ƚŚĂƚĂƌĞŶŽƚ dLJƉŝĐĂůzŝĞůĚĐŽKƌŐĂŶŝnjĂƚŝŽŶĂů^ƚƌƵĐƚƵƌĞ ͞D>WͲĂďůĞ͟ĂƐƐĞƚƐ͘ ƒ /ŶϮϬϭϯ͕ĂŶĞǁƚLJƉĞŽĨǀĞŚŝĐůĞǁĞŶƚƉƵďůŝĐ ǁŝƚŚĂƐƚŽƌLJǀĞƌLJƐŝŵŝůĂƌƚŽĂŶD>W ďƵƚ ǁŝƚŚŽƵƚƉŽƐƐĞƐƐŝŶŐĂƐƐĞƚƐƚŚĂƚǁŽƵůĚƋƵĂůŝĨLJ ĨŽƌƉĂƐƐͲƚŚƌŽƵŐŚƚĂdžƚƌĞĂƚŵĞŶƚ͘>ŝŬĞD>WƐ͕ zŝĞůĚĐŽ ĂŶĚƐŝŵŝůĂƌĐŽŵƉĂŶŝĞƐĂƌĞƉŽƐŝƚŝŽŶŝŶŐ ƚŚĞŵƐĞůǀĞƐĂƐǀĞŚŝĐůĞƐĨŽƌŝŶǀĞƐƚŽƌƐƐĞĞŬŝŶŐ ƐƚĂďůĞĂŶĚŐƌŽǁŝŶŐĚŝǀŝĚĞŶĚŝŶĐŽŵĞĨƌŽŵĂ ĚŝǀĞƌƐŝĨŝĞĚƉŽƌƚĨŽůŝŽŽĨůŽǁĞƌͲƌŝƐŬŚŝŐŚͲƋƵĂůŝƚLJ ĂƐƐĞƚƐ͘DŽƌĞŽĨƚŚĞƐĞƚLJƉĞƐŽĨǀĞŚŝĐůĞƐĂƌĞŝŶ ƚŚĞƉůĂŶŶŝŶŐƐƚĂŐĞƐ͘ ƒ ŽŵĞƐƚŝĐǀĞƌƐƵƐĨŽƌĞŝŐŶ͞zŝĞůĚŽƐ͟ĂŶĚ ĚĞǀĞůŽƉŵĞŶƚŽĨƚŚĞďƌŽĂĚĞƌŵĂƌŬĞƚ

ϯϰ ŽŵƉĂƌŝƐŽŶŽĨdƌĂĚŝƚŝŽŶĂůD>W ĂŶĚzŝĞůĚĐŽ ^ƚƌƵĐƚƵƌĞƐ

dƌĂĚŝƚŝŽŶĂůD>W KƌŐĂŶŝnjĂƚŝŽŶĂů^ƚƌƵĐƚƵƌĞ dLJƉŝĐĂůzŝĞůĚĐŽ KƌŐĂŶŝnjĂƚŝŽŶĂů^ƚƌƵĐƚƵƌĞ

17 8/28/2015

ϯϱ hWͲ^ƚƌƵĐƚƵƌĞ dŚĞhWͲ^ƚƌƵĐƚƵƌĞͶ ǁŚŝĐŚŽĨĨĞƌƐƚĂdžďĞŶĞĨŝƚƐƚŽƉƌĞͲ/WKŝŶǀĞƐƚŽƌƐĂŶĚƐƉŽŶƐŽƌƐͶ ůŝŬĞůLJǁŝůůĞdžƉĂŶĚĂŵŽŶŐĐŽŵƉĂŶŝĞƐ͘ dLJƉŝĐĂůhWͲKƌŐĂŶŝnjĂƚŝŽŶĂů^ƚƌƵĐƚƵƌĞ ƒ /ŶƵƐŝŶŐƚŚŝƐƐƚƌƵĐƚƵƌĞ͕ƚŚĞƉƵďůŝĐĐŽŵƉĂŶLJ;͞/WKŽ͟Ϳ ƚLJƉŝĐĂůůLJŽǁŶƐĂƐƵďƐƚĂŶƚŝĂůĞƋƵŝƚLJŝŶƚĞƌĞƐƚŝŶĂƐƵďƐŝĚŝĂƌLJ ,ŝƐƚŽƌŝĐ ŚŽůĚŝŶŐĐŽŵƉĂŶLJ;͞,ŽůĚŝŶŐƐ͟Ϳ͕ǁŚŝĐŚŽǁŶƐƚŚĞŽƉĞƌĂƚŝŶŐ WƵďůŝĐ DĞŵďĞƌƐ dĂdžZĞĐĞŝǀĂďůĞ ĂƐƐĞƚƐ͘dŚĞĞƋƵŝƚLJŝŶƚĞƌĞƐƚƐŝŶ,ŽůĚŝŶŐƐŶŽƚŚĞůĚďLJ/WKŽ ŐƌĞĞŵĞŶƚ ĂƌĞƚLJƉŝĐĂůůLJŽǁŶĞĚďLJƚŚĞƉƌĞͲ/WKŝŶǀĞƐƚŽƌƐ͕ǁŚŝĐŚŵĂLJ ϭϬϬйůĂƐƐ^ŚĂƌĞƐ ϭϬϬйůĂƐƐ^ŚĂƌĞƐ DĂũŽƌŝƚLJǀŽƚŝŶŐƉŽǁĞƌ DŝŶŽƌŝƚLJǀŽƚŝŶŐƉŽǁĞƌ ĐŽŶƐŝƐƚǁŝƚŚŝŶĚŝǀŝĚƵĂůŝŶǀĞƐƚŽƌƐ͕ƉƌŝǀĂƚĞĞƋƵŝƚLJĨƵŶĚƐŽƌ EŽŶͲĞĐŽŶŽŵŝĐŝŶƚĞƌĞƐƚ ϭϬϬйĞĐŽŶŽŵŝĐŝŶƚĞƌĞƐƚ

ŽƚŚĞƌƐ͘ ϭϬϬйůĂƐƐhŶŝƚƐ džĐŚĂŶŐĞZŝŐŚƚ /WKŽ ƒ dŚĞƉƌĞͲ/WKŝŶǀĞƐƚŽƌƐŝŶ,ŽůĚŝŶŐƐŚĂǀĞƚŚĞƌŝŐŚƚƚŽĞdžĐŚĂŶŐĞ ϭϬϬйůĂƐƐhŶŝƚƐ ƚŚĞŝƌ,ŽůĚŝŶŐƐĞƋƵŝƚLJŝŶƚĞƌĞƐƚƐĨŽƌƐŚĂƌĞƐŝŶ/WKŽ͕ĂƚǁŚŝĐŚ ^ŽůĞDĂŶĂŐŝŶŐDĞŵďĞƌ ƉŽŝŶƚ/WKŽ ŐĞƚƐĂƐƚĞƉƉĞĚͲƵƉƚĂdžďĂƐŝƐŝŶƚŚĞ,ŽůĚŝŶŐƐ ĞƋƵŝƚLJŝŶƚĞƌĞƐƚƐ;ǁŚŝĐŚƌĞƐƵůƚƐŝŶƚĂdžƐĂǀŝŶŐƐƚŽ/WKŽ ,ŽůĚŝŶŐƐ>> ƚŚƌŽƵŐŚĂĚĚŝƚŝŽŶĂůĚĞƉƌĞĐŝĂƚŝŽŶĂŶĚĂŵŽƌƚŝnjĂƚŝŽŶͿĂŶĚƚŚĞ ƉƌĞͲ/WKŝŶǀĞƐƚŽƌƐĂƌĞƚĂdžĞĚŽŶĂŶLJŐĂŝŶƌĞĐŽŐŶŝnjĞĚĂƐĂ ƌĞƐƵůƚŽĨƚŚĞĞdžĐŚĂŶŐĞ͘ KƉĞƌĂƚŝŶŐ ƒ dŚĞƉƌĞͲ/WKŝŶǀĞƐƚŽƌƐĂŶĚ/WKŽ ŵĂLJĞŶƚĞƌŝŶƚŽĂƚĂdž ^ƵďƐŝĚŝĂƌŝĞƐ ƌĞĐĞŝǀĂďůĞĂŐƌĞĞŵĞŶƚƉƵƌƐƵĂŶƚƚŽǁŚŝĐŚ/WKŽ ǁŽƵůĚƉĂLJ ƚŚĞƉƌĞͲ/WKŝŶǀĞƐƚŽƌƐĂƉŽƌƚŝŽŶ;ƚLJƉŝĐĂůůLJϳϱйƚŽϴϱйͿŽĨƚŚĞ ƚĂdžďĞŶĞĨŝƚƐƌĞĂůŝnjĞĚĨƌŽŵƚŚĞďĂƐŝƐƐƚĞƉͲƵƉƌĞƐƵůƚŝŶŐĨƌŽŵ ƚŚĞĞdžĐŚĂŶŐĞƐ͘

ϯϲ ŽŵƉĂƌŝƐŽŶŽĨŽŶǀĞŶƚŝŽŶĂůWƵďůŝĐŽ͘ ΘhWͲ^ƚƌƵĐƚƵƌĞƐ

dLJƉŝĐĂůŽŶǀĞŶƚŝŽŶĂůWƵďůŝĐŽŵƉĂŶLJ dLJƉŝĐĂůhWͲKƌŐĂŶŝnjĂƚŝŽŶĂů^ƚƌƵĐƚƵƌĞ KƌŐĂŶŝnjĂƚŝŽŶĂů^ƚƌƵĐƚƵƌĞ

,ŝƐƚŽƌŝĐ WƵďůŝĐ DĞŵďĞƌƐ dĂdžZĞĐĞŝǀĂďůĞ ŐƌĞĞŵĞŶƚ ,ŝƐƚŽƌŝĐ ^ŚĂƌĞŚŽůĚĞƌƐ WƵďůŝĐ ϭϬϬйůĂƐƐ^ŚĂƌĞƐ ϭϬϬйůĂƐƐ^ŚĂƌĞƐ DĂũŽƌŝƚLJǀŽƚŝŶŐƉŽǁĞƌ DŝŶŽƌŝƚLJǀŽƚŝŶŐƉŽǁĞƌ EŽŶͲĞĐŽŶŽŵŝĐŝŶƚĞƌĞƐƚ ϭϬϬйĞĐŽŶŽŵŝĐŝŶƚĞƌĞƐƚ

ϭϬϬͲyй yй ϭϬϬйůĂƐƐhŶŝƚƐ džĐŚĂŶŐĞZŝŐŚƚ /WKŽ

WƵďůŝĐŽŵƉĂŶLJ ϭϬϬйůĂƐƐhŶŝƚƐ ^ŽůĞDĂŶĂŐŝŶŐDĞŵďĞƌ

,ŽůĚŝŶŐƐ>>

KƉĞƌĂƚŝŶŐ ^ƵďƐŝĚŝĂƌŝĞƐ KƉĞƌĂƚŝŶŐ ^ƵďƐŝĚŝĂƌŝĞƐ

18 8/28/2015

ϯϳ

ůŽƐŝŶŐZĞŵĂƌŬƐ

ƒ ƵƌƌĞŶƚĞĐŽŶŽŵŝĐĐŽŶĚŝƚŝŽŶƐĐŽŶƚŝŶƵĞƚŽƉƌĞƐĞŶƚĂ ĐŚĂůůĞŶŐŝŶŐĞŶǀŝƌŽŶŵĞŶƚĨŽƌĞdžƉůŽƌĂƚŝŽŶĂŶĚ ƉƌŽĚƵĐƚŝŽŶĐŽŵƉĂŶŝĞƐ͘ ƒ ǀĂůƵĂƚŝŽŶŽĨǀĂƌŝŽƵƐĨŽƌŵƐŽĨĂĐĐĞƐƐŝŶŐĐĂƉŝƚĂů ;ĚĞďƚ͕ƉƌŝǀĂƚĞũŽŝŶƚǀĞŶƚƵƌĞĐĂƉŝƚĂů͕ƉƵďůŝĐŵĂƌŬĞƚƐͿŝƐ ĐƌŝƚŝĐĂů͕ŝŶĐůƵĚŝŶŐĂŶLJŽƉĞƌĂƚŝŽŶĂůŽƌĨƵƚƵƌĞŐƌŽǁƚŚ ĐŽŶƐƚƌĂŝŶƚƐ;ŽƌŽďůŝŐĂƚŝŽŶƐͿƚŚĂƚĂƌĞŝŶŚĞƌĞŶƚŝŶĞĂĐŚ ŽƉƚŝŽŶ͘

19 Kevin L. Col osi mo x Ligaon x Construcon x Corporate x Federal Government Contracts T: 724.743.3433 x Mergers and Acquisions F: 724.746.6645 x Commercial Agreements [email protected]

x Duquesne University (J.D., 1997) x Indiana University of Pennsylvania Kevin Colosimo’s pracce spans the areas of oil and gas ligaon, energy law, (B.A., Magna Cum Laude, 1994) and business and contract law. He also has experience in internaonal trade and creditors’ rights, and has provided counsel to clients on a wide range of x Pennsylvania, 1997 other legal maers that include risk management alternaves, claims x Ohio, 2013 assessment, and ligaon strategy. Kevin was drawn to pracce energy law by x Pennsylvania Supreme Court x U.S. Supreme Court the entrepreneurial spirit and potenal of the burgeoning industry in x U.S. Court of Internaonal Trade Pennsylvania. He serves as Managing Partner of Burleson’s Pisburgh office. x U.S. Court of Appeals for the Third Circuit

x U.S. District Court for the Middle District of Kevin is a frequent author and speaker on legal issues facing the oil and gas Pennsylvania industry. He is a regular advocate for the industry at the State Capitol in x U.S. District Court for the Western District of Harrisburg. He is a member of the Energy and Environmental Law, Construcon Pennsylvania x U.S. Bankruptcy Court for the Western District of Law, Commercial Law and Bankruptcy, and Federal Court Secons of the Pennsylvania Allegheny Bar Associaon. He also serves as Trustee at Large for the Energy x U.S. District Court for the Eastern and Mineral Law Foundaon and is a member of the United Way of Allegheny District of Michigan County’s Tocqueville Society, in addion to involvement with various local x U.S. District Court for the Western District of Texas x U.S. District Court for the Southern District of New York charies. Kevin is AV rated by the Marndale-Hubbell Law Directory. (Pro Hac Vice) x U.S. District Court for the Eastern District of Virginia (Pro Hac Vice) x Representaon of oil and gas exploraon and producon company in first x U.S. Bankruptcy Court for the District of Delaware (Pro ever applicaon for compulsory unizaon in furtherance of Hac Vice) unconvenonal well development under Pennsylvania’s Oil and Gas x U.S. Bankruptcy Court for the Northern District of Conservaon Law. (Pa. Dept. of Environmental Protecon/ Pa. California (Pro Hac Vice) Environmental Hearing Board) x U.S. Bankruptcy Court for the Western District of Kentucky (Pro Hac Vice) x Representaon of oil and gas exploraon and producon company in acon by coal operator to recover damages for coal allegedly rendered inaccessible by virtue of unconvenonal well pad development. (U.S. District Court for the Middle District of Pennsylvania) x Pennsylvania Super Lawyers, 2015, Thomson Reuters x AV Rated by the Marndale-Hubbell Law Directory x Representaon of oil and gas exploraon and producon company in x Pennsylvania Super Lawyer, 2013, Thomson Reuters substanve validity challenge to zoning ordinance and zoning permit x Pennsylvania Rising Star, 2005-2007 and 2010-2012, challenge before municipal zoning hearing board. (Middlesex Twp., Butler Thomson Reuters Co., PA Zoning Hearing Board) x Named to “Who’s Who in Energy,” 2011, 2012, 2014 by x Member of the University of Pisburgh Instute of Polics’ Marcellus the PiƩsburgh Business Times Roundtable (2012-2014). Co-chair of Commiee on Pooling and Unizaon.

Kevin L. Colosimo x Represented an exploraon and producon company in evaluang and defending allegaons from cizens that its drilling acvies had caused contaminants, including possibly chemicals used in hydraulic fracturing, and methane migraon to adversely impact their residenal private drinking water supplies; and in evaluang the company’s pre- and post-drilling environmental invesgaons, including providing legal advice with respect to those pracces x Represenng oil and gas exploraon company in class acon ligaon brought by putave lessors seeking to enforce terms of non-binding lease offers (U.S. District Court for the Western District of Pennsylvania) x Represenng oil and gas exploraon and producon company in defense of acon seeking equitably enforce purchase and sale agreement following terminaon (Private Arbitraon, Pisburgh, PA) x Represented an oil and gas exploraon and producon company in private water well contaminaon disputes (various Courts of Common Pleas) x Represented an oil and gas exploraon and producon company in mechanics lien claims brought by a disgruntled subcontractor (Court of Common Pleas Butler County) x Represented oil and gas lessees in royalty and lease avoidance ligaon (U.S. District Court for the Western District of Pennsylvania and various Courts of Common Pleas) x Represented an oil and gas exploraon and producon company in lease dispute ligaon (Court of Common Pleas Cameron County) x Represented an oil and gas exploraon and producon company in an employment dispute (Court of Common Pleas Allegheny County) x Represenng oil and gas exploraon and producon company in contractual dispute involving drill pipe failure (Courts of Common Pleas Beaver County) x Represented an oil and gas exploraon and producon company in quiet tle acons (Court of Common Pleas Jefferson County and Court of Common Pleas Clearfield County) x Represented an oil and gas exploraon and producon company in land use and zoning disputes (Court of Common Pleas Butler County) x Represented an oil and gas exploraon and producon company in the selement of a class acon royalty dispute (Court of Common Pleas Westmoreland County) x Represented a quarry products manufacturer in a warranty and misrepresentaon acon brought by a quarry operator to recover alleged lost profits; unanimous jury verdict May 2011 (Court of Common Pleas Lawrence County) x Represented an architect in ligaon with a restaurant complex alleging personal injury resulng from alleged parking lot design errors (Court of Common Pleas Blair County) x Represented a business owner in a partnership dispute and business separaon (private arbitraon) x Represented an architect in a premises liability claim involving allegaons of architectural design defects at a hospital professional building resulng in personal injury to a hospital patron (Court of Common Pleas Cambria County) x Represented an environmental tesng laboratory and laboratory personnel in an acon brought by a homeowner alleging the laboratory’s error and omission in its performance of asbestos abatement tesng (Court of Common Pleas Allegheny County)

Kevin L. Colosimo x Represented an engineering firm in a breach of contract claim brought by a municipality stemming from the failure of ducle iron piping at a water treatment facility; the case involved mulple party defendants and allegaons of improper design specificaons and negligent workmanship (Court of Common Pleas Allegheny County) x Represented an architect in a three-way dispute with a municipality owner, electrical engineer, and HVAC contractor; the case involved issues of design error and omission, breach of contract, and non-conformance with design specificaons (private administraon) x Represented an architect in a dispute involving a municipal owner and consulng HVAC engineer in a claim arising from alleged design specificaon errors in the geothermal heang system for an intermodal transportaon center (private arbitraon) x Represented a structural engineer in an error/omission claim following the collapse of a structure caused by excavaon subsidence (Court of Common Pleas Allegheny County) x Represented a Pisburgh law firm in a case brought by a disgruntled taxpayer following the firm’s representaon of a municipal development authority in a regional tax iniave campaign. (U.S. District Court for the Western District of Pennsylvania) x Represented a municipal development authority in a regional tax iniave campaign (U.S. District Court for the Western District of Pennsylvania) x Represented an architect in a claim by a general contractor for delay and disrupon arising out of the construcon of an athlec sports complex at a high school in Erie County, Pennsylvania (private arbitraon) x Represented a contractor in a dispute involving a bidder’s failure to meet design specificaons for the mul million-dollar relining of water piping and involving enforcement of Pennsylvania’s Right to Know Act for public disclosure of documents (Pennsylvania Commonwealth Court) x Represented an engineering firm and municipality in a dispute brought by a disgruntled subcontract bidder on a municipal wastewater treatment facility renovaon project (Court of Common Pleas Washington County) x Represented a commercial real estate developer in a successful challenge to the public bidding process and award of contract for the sale of school property; the case is reported at Fedorko ProperƟes, Inc. v. Millcreek Twp. School Dist., 755 A.2d 118 (Pa. Commw. 2000), allocator denied, 771 A.2d 1289 (Pa. 2001) x Represented Mississippi asbestos personal injury lawyers in a legal malpracce class acon brought on behalf of a class of approximately 3,600 asbestos clients in Pennsylvania, Ohio, and Indiana x Represented a Pisburgh law firm in a legal malpracce acon brought by a former client of the firm who was convicted of federal bankruptcy fraud due to alleged malpracce of the firm (Court of Common Pleas Allegheny County) x Represented West Virginia personal injury lawyers in a legal malpracce acon stemming from the alleged mishandling of a medical malpracce acon (Court of Common Pleas Allegheny County) x Represented a Pisburgh law firm in a case brought by a disappointed ligant alleging abuse of process following the firm’s successful defense of a dental malpracce claim (Superior Court of Pennsylvania) x Represented a Pisburgh law firm in an abuse of process and civil rights claim brought following the firm’s successful defense of a corporate client in a commercial property dispute (U.S. District Court for the Western District of Pennsylvania) Kevin L. Colosimo

x Represented a manufacturer in products liability/toxic tort ligaon involving alleged exposure to silica-containing products (Kanawha County, West Virginia) x Represented a commercial real estate developer in an easement and boundary line injuncon acon involving construcon of a mulmillion-dollar shopping center facility; the case is reported at Fedorko ProperƟes, Inc. v. C.F. Zurn and Associates, 720 A.2d 147 (Pa. Super. 1998) x Represented an internaonal telecommunicaons reseller in a dispute with AT&T over filed rate tariffs and breach of contract to provide telecommunicaons services (U.S. District Court for the Western District of Pennsylvania (Erie)) x Represented ophthalmologic surgeons in a class acon lawsuit brought by former LASIK paents for breach of contract to pro- vide post-surgical care and treatment (Court of Common Pleas Allegheny County) x Represented the County of Allegheny pro bono in an acon challenging the constuonality of the Ten Commandments display at the Allegheny Courthouse; the case is reported at Modrovich v. Allegheny County, 385 F.3d 397 (3rd Cir. 2004) (U.S. Court of Appeals for the Third Circuit) x Represented an internaonal commodies broker in a contractual procurement dispute with a purchaser over an-dumping tariff and import duty obligaons (U.S. District Court for the Western District of Texas (El Paso)) x Represented an internaonal commodies broker in defense of a bankruptcy avoidance acon (U.S. Bankruptcy Court for the Northern District of California) x Represented an internaonal commodies broker in an economic loss and product contaminaon claim brought by a manufac- turing componder following a warehouse shipment error (private arbitraon, Ontario, Canada) x Represented an architect in a claim by a school district alleging error/omission in connecon with project change orders (private arbitraon) x Represented construcon products manufacturers in avoidance and acon seeking recovery of $2.8 million in transfers made by a debtor (U.S. Bankruptcy Court for the Western District of Kentucky) x Represented a municipality mayor in an elecon law peon challenge acon (Pennsylvania Supreme Court) x Represented a general contractor in a dispute with a county regarding construcon of a $40 million prison (private arbitraon) x Represented a brokerage firm during an internal invesgaon to determine the propriety of trades under a 10(b)(5)(1) plan

x Presenter, “IEL Forum,” IEL’s 66th Annual Oil & Gas Law Conference, Houston, TX, February 2015 x Author, “John Kasich’s proposed tax increase on the oil, gas, industry likely to be crippling,” Cleveland Plain Dealer, February 12, 2015 x Author, “Fracking is making the state and Phil. Energy leaders,” Philadelphia Inquirer, February 2, 2015 x Presenter, “This Year’s Hot Issues in Leasing,” IEL’s 5th Law of Shale Plays Conference, Pisburgh, PA, September 2014 x Presenter, “Landman at the Door,” EMLF’s 2014 Kentucky Law Mineral Law Conference, Lexington, KY, October 2014 x Presenter, “Marcellus Shale Development,” St. Barnabas Health System’s CEO Leadership Conference, Gibsonia, PA, September 2014

Kevin L. Colosimo x Author, “Don’t Kill the Golden Goose,” PiƩsburgh Post GazeƩe, June 1, 2014 x Presenter, “Defensible Title: Defining Standard in Acquisions and Drilling Title Cerficaons,” EMLF 35th Annual Instute, June 2014 x Presenter, “Noble Energy, Lessors’ Remorse Lease Busn in Appalachia,” December 2013 x Presenter, “Jurisdiconal Consideraons for the Oil and Gas Praconer,” EMLF Kentucky Law Mineral Conference, October 2013 x Presenter, “Pooling and Unizaon in the Marcellus and Uca Shales: Pennsylvania’s Challenges and Opportunies,” Chev- ron Land Symposium, October 2013 x Presenter, “Recent Developments in Oil and Gas Law,” IEL’s Annual Oil and Gas Conference, February 2013 x Presenter, “2012 United States Oil and Gas Law Update,” IEL’s 64th Annual Oil and Gas Law Conference, February 2013 x Author, “Modernize Pa.’s Oil and Gas Conservaon Law,” PiƩsburgh Business Times, January 11, 2013 x Presenter, “Lessors’ Remorse – Lease Busn’ in the Appalachia,” EMLF Kentucky Mineral Law Conference, October 2012 x Author, “Compulsory Pooling and Unizaon in the Marcellus Shale, Pennsylvania’s Challenges and Opportunies,” Pennsylvania Bar AssociaƟon Quarterly, Vol. 83, No. 2, April 2012 x Presenter, “Developing an Oil and Gas Infrastructure CLE,” Allegheny County Bar Associaon, May 2012 x Presenter, “Infrastructure Issues in Oil and Gas Development CLE,” Pennsylvania Bar Associaon Instute, March 2012 x Presenter, “Developing Jurisprudence in the Marcellus Shale,” EMLF at 32 Energy & Min. L. Inst. 269-301, 2011 x Presenter, “Marcellus Shale Oil and Gas Case Update,” EMLF Kentucky Mineral Law Conference September 2011 x Presenter, “Oil and Gas Related Ligaon CLE,” Washington County Bar Associaon, May 26, 2011 x Presenter, “Importer Security Filings and Addional Carrier Requirements (a.k.a. 10+2) – Flexible Enforcement Draws to a Close, and Customs Publishes New Guidelines for the Migaon of Penales,” Communiqué, August 2009 x Presenter, “Internaonal Unfair Trade Pracce Remedies in Tough Economic Times,” Thorp Reed & Armstrong seminar, June 2009

x Vodenichar v. Halcon Energy ProperƟes, Inc., 733 F.3d 497 (3d Cir. 2013)(counsel to Appellant) x Allegheny Enters. v. J-W OperaƟng Co., 2014 U.S. Dist. LEXIS 27998 (M.D. Pa. Mar. 5, 2014) (counsel to Defendants) x Huber v. Taylor, 469 F.3d 67 (3rd Cir. 2006); counsel to appellee x Modrovich v. Allegheny County, 385 F.3d 397 (3rd Cir. 2004); brief of appellee x Fedorko ProperƟes, Inc. v. Millcreek Township School District, 755 A.2d 118 (Pa. Commw. 2000), allocator denied, 479 W.D. Alloc. Dkt. 2000 (January 2, 2001); counsel to appellee x Erie Net, Inc. v. Velocity Net, Inc., 156 F.3d 513 (3rd Cir. 1998); brief of appellee x Fedorko ProperƟes, Inc. v. C.F. Zurn & Associates, 720 A.2d 147 (Pa. Super. 1998); counsel to appellee x In re Estate of Burger, 898 A.2d 547 (Pa. May 25, 2006); counsel to appellee

Kevin L. Colosimo

x Mid-American Gunite, Inc. v. Sauereisen, Inc., 2006 WL 1374505 (E.D.Mich. May 19, 2006); counsel to defendant x Guƫlla v. Pennsylvania Mfrs. Ass’n. Ins. Co., 2005 WL 2367768 (W.D.Pa. Sep 27, 2005); counsel to defendant x In re Loranger Mfg. Corp., 324 B.R. 575 (Bankr.W.D.Pa. Apr 07, 2005); counsel to defendant

x Pennsylvania Bar Associaon x Allegheny County Bar Associaon x Erie County Bar Associaon x Washington County Bar Associaon x U.S. Court of Internaonal Trade Bar Associaon x Energy and Mineral Law Foundaon, Trustee at Large, Assistant Secretary/Treasurer, Execuve Commiee (2014-2015) x University of Pisburgh Instute of Polics, Marcellus Roundtable Member x Seton Hill University, Board of Trustees x Allegheny County Parks Foundaon, Board of Directors x United Way of Allegheny County, Tocqueville Society x Erie County Board of Viewers, Former Chairman x American Cancer Society x North Hills Community Outreach x Leadership Pisburgh XXII Graduate Donald D. Jackson Partner [email protected] T +1 713.547.2026 F +1 713.236.5645

Houston

Don Jackson has more than 20 years of wide-ranging litigation experience with PRACTICES particular emphasis on energy industry and intellectual property matters. His Litigation energy litigation experience includes disputes over royalties, prudent Oil and Gas Litigation operations, lease terminations, joint operating agreements, product liability, and Energy Litigation removal of the operator. Don's intellectual property litigation experience Oil and Gas includes patents, copyrights, trademarks, and trade secrets. He also has

Energy, Power and Natural Resources extensive experience representing industry-leading companies in lawsuits involving business torts, eminent domain, and defamation. Intellectual Property Litigation

Trademarks Advertising and Brand Don is recognized in The Best Lawyers in America® by Woodward/White, Inc. Management for his work in Product Liability Litigation, 2012-2015. He was selected for Media and Entertainment Litigation inclusion in Texas Super Lawyers by Thomson Reuters in Energy & Natural Trade Secret Litigation Resources, Business Litigation, and Intellectual Property Litigation, 2013-2015.

Copyright Don was also recognized in Houston Business Journal's list of Who's Who in Energy, American City Business Journals, 2013. He has a peer rating of AV® INDUSTRIES Preeminent™ 5.0 out of 5 by Martindale Hubbell. Media, Entertainment and Sports

TRENDING ISSUES Before law school, Don was an engineer for Exxon and developed oil and gas

Hydraulic Fracturing fields in Texas and Alaska. He received a Texas professional engineer's license, has degrees in Chemistry and Chemical Engineering, and is a registered patent EDUCATION AND CLERKSHIPS attorney.

J.D., University of Texas at Austin School of Law, 1993, with honors; Order of the Recent Publications Coif; Article and Notes Editor, Texas International Law Journal; E. Ernest "A Look at Underground Trespass under Texas Law," ABA Section of Goldstein Best Editor Award Litigation, Energy Litigation, February 27, 2015. Chemical Engineer, M.S.Ch.E., University of Houston, 1984

http://www.haynesboone.com/people/j/jackson donald 1 B.S., Southern Methodist University, 1981, magna cum laude; Phi Beta Kappa

BAR ADMISSIONS

Texas

U.S. Patent and Trademark Office

COURT ADMISSIONS

U.S. Court of Appeals for the Fifth Circuit

U.S. District Court for the Southern District of Texas

U.S. District Court for the Eastern District of Texas

U.S. District Court for the Western District of Texas

LANGUAGES

German

Professional and Community Activities

State Bar of Texas Registered to practice before U.S. Patent and Trademark Office Houston Bar Association, Chair, Oil, Gas & Mineral Law Section (2010-2011) Houston Intellectual Property Law Association Houston Bar Foundation, Fellow

Selected Client Representations

Lead counsel for major Eagle Ford Shale operator sued for trespass and obtained take nothing judgment after successfully striking opponent’s expert. Lead counsel for S. Texas operator suing a neighboring operator for underground trespass by waste gas injection and obtained favorable confidential settlements from the offset operator, the operator’s engineering contractor, and the client’s primary insurer. Lead counsel for an offshore platform operator suing a lifeboat vendor for warranty claims and obtained a substantial recovery. Co-counsel for a refining technology company and obtained a permanent injunction and damages against a former executive who misappropriated a trade secret catalyst formula. As lead counsel, defended world’s largest fertilizer manufacturer and obtained complete dismissal of claims for

http://www.haynesboone.com/people/j/jackson donald 2 breach of contract and tortious interference. As lead counsel, represented small independent operator damaged by defective well casing and obtained substantial settlements from multiple supply chain defendants. As co-counsel, represented small independent against major operator for joint operating agreement violations and obtained substantial settlement from defendant buyer and seller of multi-million dollar working interests. As lead counsel, represented pipeline affiliate of supermajor energy company in arbitration and recovered $4.3 million arbitration award against manufacturer of defective valves. As lead counsel, defended start-up oilfield service company and former employees of rival oilfield service company in trade secret/fiduciary duty dispute and achieved "walk-away" after filing counterclaims against the former employer. As lead counsel, prosecuted major energy company's trademark infringement claim and obtained permanent injunction resulting in elimination of defendant's website. Partnered with other law firms as a team leader to represent the world's largest contract semiconductor manufacturer in trade secret litigation to obtain a $200 million settlement for the client. As lead counsel, represented independent oil and gas operator in multiple lease termination disputes and negotiated lease extensions. As lead counsel for a small independent oil and gas operator, obtained favorable settlement of cost overrun disputes with working interest owners. As lead counsel, represented small independent working interest owner and successfully removed the operator for misappropriating joint interest funds. Defended European software provider in patent infringement lawsuit and obtained favorable settlement after initial discovery and reexamination of patents. Represented world's largest energy drink provider in trademark infringement lawsuit and obtained permanent injunction and damages. Represented small independent oil and gas company in dispute with operator over offshore plugging and abandoning costs. Defended major chemical company in patent infringement lawsuit and obtained favorable settlement. Represented small independent working interest owner and obtained favorable settlement against operator, a major energy company, in dispute over damaged wells and breach of operating agreement. As lead counsel, represented major Japanese machinery manufacturer in trade secret litigation against former employees and secured permanent injunction. Defended gas marketing affiliate of supermajor energy company accused of fraud and obtained favorable settlement after month-long jury trial. As lead counsel, defended nation's second largest energy trading company accused of copyright infringement and obtained favorable settlement after filing summary judgment motion. As lead counsel in trademark infringement lawsuit represented nation's largest funeral service company and

http://www.haynesboone.com/people/j/jackson donald 3 obtained permanent injunction and damages. As lead counsel for trading affiliate of supermajor energy company obtained favorable settlement of claims against major energy company for underpayment of oil purchases. Represented gas marketing affiliate of supermajor energy company in consumer class action that resulted in dismissal. Lead counsel at trial and on appeal for the Unauthorized Practice of Law Committee - permanent injunction against defendant affirmed. Kubala v. Unauthorized Practice of Law Committee for the Supreme Court of Texas, 133 S.W.3d 790 (Tex. App. -Texarkana 2004, no pet.). Represented pipeline affiliate of supermajor energy company in numerous eminent domain cases and obtained rights-of-way. Defended book publisher and authors in defamation suit at trial and on appeal, resulting in take nothing judgment. Harvest House v. The Local Church, 190 S.W.3d 204 (Tex. App. -Houston [1st Dist.] 2006, pet. denied).

News and Publications

06/04/2015 - Don Jackson and Pierre Grosdidier in Law360: Hess Escapes Bid To Revive Well Pollution Suit

04/09/2015 - Oral Agreement to Delay Oil and Gas Lease Closing Did Not Violate Statute of Frauds

03/11/2015 - The Texas Supreme Court Holds that the Executive Rights Holder Must Stand Trial for Claims of Breach of the Duty Owed to a Non-Executive

02/10/2015 - Texas Supreme Court Dodges Subsurface Trespass Question a Second Time

01/30/2015 - Oral Agreement to Delay Oil and Gas Lease Closing Did Not Violate Statute of Frauds

01/23/2015 - Don Jackson and Pierre Grosdidier in Law360: Hess Drains Well Pollution Suit After Excluding Expert

01/08/2015 - Underground Trespass

11/20/2014 - Haynes and Boone in Law360: Hess Says Rivals' Well Contamination Suit is Time Barred

11/4/2014 - Lightning Oil Company v. Anadarko E&P Offshore, LLC

10/06/2014 - Oil and Gas Monitor Guest Article: Things that Go Bump in the Night: Litigation Risks that Leave Oil and Gas CEOs Sleepless

07/31/2014 - Oil and Gas Litigation Newsletter, July 2014

07/03/2014 - Haynes and Boone in Law360: Royalty Ruling Boosts Energy Cos. In Permian Basin Fights

07/02/2014 - Texas Supreme Court Clarifies Royalty Calculations for Enhanced Oil Recovery

http://www.haynesboone.com/people/j/jackson donald 4 07/01/2014 - Law360 Guest Article: Texas High Court Continues To Rule In Favor Of Lessees

06/23/2014 - Texas Supreme Court Holds that Mineral Lessee Has the Right to Use a Road across Non-Producing Pooled Tracts

04/04/2014 - Oil and Gas Litigation Newsletter, April 2014

03/04/2014 - State Bar of Texas CLE: Predicting Litigation Trends in Oil & Gas

11/21/2013 - Business Journals’ “Who’s Who in Energy” Directory Features Haynes and Boone Partners

05/13/2010 - To Have Committed Inequitable Conduct or Not? That is the Question - to be Answered

http://www.haynesboone.com/people/j/jackson donald 5

ϴͬϮϴͬϮϬϭϱ

6th Annual Law of Shale Plays Conference - Institute for Energy Law ♦♦♦ Recent Developments in Texas, Louisiana, and Oklahoma Oil and Gas Law

Presented by: Donald D. Jackson

September 10, 2015

© 2015 Haynes and Boone, LLP

Texas, Louisiana, and Oklahoma – 2014 & 2015

Overview:

• Summary of topics covered in new opinions

• Case briefs on select cases and issues

© 2015 Haynes and Boone, LLP 2

© 2015 Haynes and Boone, LLP

ϭ ϴͬϮϴͬϮϬϭϱ

Texas – 2014 & 2015

• Contract disputes: - Operating Agreements, Purchase and Sale Agreements, Services Contracts, etc.

• Royalties and post-production costs

• Lease Termination

And more . . .

© 2015 Haynes and Boone, LLP 3

© 2015 Haynes and Boone, LLP

Texas – 2014 & 2015 (cont.)

• Statute of Limitations

• Subsurface Trespass and Surface Accommodation

• Nuisance and Surface Trespass

• Executive Rights

© 2015 Haynes and Boone, LLP 4

© 2015 Haynes and Boone, LLP

Ϯ ϴͬϮϴͬϮϬϭϱ

Texas – Contract Disputes

XH, LLC v. Cabot Oil & Gas, (Tyler CoA 2014, no pet.)

• Purchase Agreement with attached Joint Operating Agreement • Both PA and JOA had AMI provisions: • PA: leases subject to AMI • JOA: any oil/gas interest subject to AMI • Held: PA contained a supremacy provision, so Cabot’s acquisition of ORRI was not subject to AMI

© 2015 Haynes and Boone, LLP 5

© 2015 Haynes and Boone, LLP

Texas – Contract Disputes (cont.)

Petrohawk v. Jones, (Texarkana CoA 2015, pet. filed)

• 2008 agreement to acquire up to 8500 Haynesville acres at $23.5k/acre, subject to title at closing • County Clerk office frenzy, closing postponed, parties informally agreed to multiple closings • First closing: $10M escrow released and paid $51MM total for 2200 acres • 2008 financial crisis: Petrohawk refused more acreage or closings • Held: Parties agreement to multiple closings was enforceable, even if not in signed writing.

© 2015 Haynes and Boone, LLP 6

© 2015 Haynes and Boone, LLP

ϯ ϴͬϮϴͬϮϬϭϱ

Texas – Royalty Disputes

Chesapeake v. Warren, (5th Cir. 2014)

• Leases provided royalty based on amount realized “at mouth of the well.” • Leases further provided that lessors would bear proportionate expenses from lessor’s gas sales contract “to the extent incurred subsequent to those that are obligations of Lessee.” • Held, CHK could deduct post-production costs from mouth of well to sales point.

© 2015 Haynes and Boone, LLP 7

© 2015 Haynes and Boone, LLP

Texas – Royalty Disputes (cont.)

Potts v. Chesapeake, (5th Cir. 2014)

• Leases provided royalty based on “market value at point of sale” and “free of costs related to compression, dehydration . . . and transportation” • CHK sold gas at wellhead to affiliate that transported gas to La. and Al., and CHK based royalty on affiliate’s downstream price less post- production costs • Held, market value at point of sale by CHK and could be calculated by net-back, does not reduce royalty that was due

© 2015 Haynes and Boone, LLP 8

© 2015 Haynes and Boone, LLP

ϰ ϴͬϮϴͬϮϬϭϱ

Texas – Royalty Disputes (cont.)

Chesapeake v. Hyder, (Tex. 2015)

• Hyder’s lease provided royalty should be free of all production and post-production costs. Also, included an ORRI of 5% of gross production on certain directional wells • Hyder argued the ORRI should be free of post- production costs, in part based on the lease’s “disclaimer” that the holding in Heritage Resources shall have no application • Held,(5-4) disclaimer ineffective, but ORRI should be free of post-production costs

© 2015 Haynes and Boone, LLP 9

© 2015 Haynes and Boone, LLP

Texas – Lease Termination

PNP Pet. v. Taylor, (San Antonio CoA 2014, pet. denied).

• Lease allowed shut-in royalty if at end of primary term a well not producing in paying quantities • Lessor argued no well “capable of producing,” no shut-in royalty possible, lease terminated • “Surrounding circumstances” evidence showed “capable of producing” had been struck from draft lease • Held, struck language showed intent to allow shut- in royalty in these circumstances, despite general understanding of shut-in royalty

© 2015 Haynes and Boone, LLP 10

© 2015 Haynes and Boone, LLP

ϱ ϴͬϮϴͬϮϬϭϱ

Texas – Lease Termination (cont.)

Rippy Interests v Nash, (Waco CoA 2014, pet. denied).

• Lease required operations for drilling before end of primary term: • Operator paid for surface damages, hired driller, set a conductor, and began site preparation • Nash locked gate at end of primary term, Rippy cut the lock, Nash called police (no arrests), Rippy drilled a pilot hole to 7900’ then stopped • Held, activities before primary term were drilling operations, genuine issue on repudiation doctrine, and drilling after alleged repudiation  waiver

© 2015 Haynes and Boone, LLP 11

© 2015 Haynes and Boone, LLP

Texas – Lease Termination (cont.)

BP v. Laddex, (Amarillo CoA 2015, pet. filed).

• Lease with one well, production slowed 8/05 to 11/06, then inexplicably returned to previous level • Top lease holder sued, claiming termination by failure to produce in paying quantities 8/06 - 11/06 • Held, evidence that production returned to both higher rate and profitability was material evidence, just looking at 15 months of low rate not reasonable

© 2015 Haynes and Boone, LLP 12

© 2015 Haynes and Boone, LLP

ϲ ϴͬϮϴͬϮϬϭϱ

Texas – Limitations

Hooks v. Samson Lone Star, (Tex. 2015).

• Hooks sued for breach of contract and fraud, obtaining a multi-million dollar verdict • Focus on plat signed by landman showing incorrect well location, and a directional survey filed with the Texas Railroad Commission that contradicted the plat • Held, a party exercising reasonable diligence may stop at more recent filings with the Texas Railroad Commission without the need to double check recent filings against earlier filings

© 2015 Haynes and Boone, LLP 13

© 2015 Haynes and Boone, LLP

Texas – Subsurface Trespass

Lightning Oil v. Anadarko, (San Antonio 2014 & 2015, pet filed).

• Drilling from one surface through a mineral lease to reach an adjoining lease. Lessee sought injunction, claimed trespass & tortious interference:

© 2015 Haynes and Boone, LLP 14

© 2015 Haynes and Boone, LLP

ϳ ϴͬϮϴͬϮϬϭϱ

Texas – Subsurface Trespass (cont.)

Lightning Oil v. Anadarko, (San Antonio 2014 & 2015, pet. filed).

• Interlocutory appeal and appeal from summary judgment • Held, no evidence of immediate and irreparable harm: • Blowout or leak unlikely, could be remedied with damages based on reserve estimates • Offset wells required even if drilling from different location

© 2015 Haynes and Boone, LLP 15

© 2015 Haynes and Boone, LLP

Texas – Subsurface Trespass (cont.)

Lightning Oil v. Anadarko, (San Antonio 2014 & 2015, pet. filed).

• Held, MSJ for Anadarko affirmed on trespass and tortious interference claims: • No right to exclude others from earth surrounding oil and gas, and surface owner had given permission to drill • Lightning had fair chance to recover oil and gas in place

© 2015 Haynes and Boone, LLP 16

© 2015 Haynes and Boone, LLP

ϴ ϴͬϮϴͬϮϬϭϱ

Texas – Surface Nuisance/Trespass

Crosstex v. Gardiner, (Fort Worth 2014, pet. filed).

• Gardiners’ 95 rural acres used for recreation and raising cattle • Crosstex built compressor station nearby, which emitted noises, prompting Gardiners’ suit for nuisance, negligence, and gross negligence • Crosstex attempted mitigation and expert’s measured noise levels that he claimed were within ANSI/Acoustical Society acceptable range for uses • Held: $2M verdict not supported by sufficient evidence, no evidence of negligence

© 2015 Haynes and Boone, LLP 17

© 2015 Haynes and Boone, LLP

Texas – Surface Nuisance/Trespass

Sciscoe v Enbridge Gathering, (Amarillo 2015, no pet. h).

• Dish, Texas homeowners complaints about airborne emissions, claimed trespass • Held: trial court erred in dismissing trespass claims, airborne particles could be a trespass if plaintiffs prove causation and injury

© 2015 Haynes and Boone, LLP 18

© 2015 Haynes and Boone, LLP

ϵ ϴͬϮϴͬϮϬϭϱ

Louisiana – 2014 & 2015

• Contract disputes: - Operating Agreements and Project Agreements

• Fair Market Value and Mineral Sales

• Imprudent Operations

And Legacy Cases . . .

© 2015 Haynes and Boone, LLP 19

© 2015 Haynes and Boone, LLP

Louisiana – Imprudent Operations

Hayes Fund v. Kerr McGee, (La. CoA 2014), writ granted (La. 2015). • Complex dispute over operations on 2 wells, 25 days of expert testimony spread over 10 months involving: • Cementing to isolate zones, chloride levels in water, use of permanent packers, casing leaks • Trial court found for operator, dismissed claims

© 2015 Haynes and Boone, LLP 20

© 2015 Haynes and Boone, LLP

ϭϬ ϴͬϮϴͬϮϬϭϱ

Louisiana – Imprudent Operations (cont.)

Hayes Fund v. Kerr McGee, (La. CoA 2014), writ granted (La. 2015). • Held, lease mandated absolute liability based on struck language: • The Lessee shall be responsible for all damages to timber and growing crops of Lessor caused by Lessee’s operations.” • Manifest error in factual findings, rendered judgment against operator for $13.4M in lost royalties • Improper collateral attack on Commission unit order setting rectangular reservoir boundaries

© 2015 Haynes and Boone, LLP 21

© 2015 Haynes and Boone, LLP

Oklahoma – 2014 & 2015

• Contract disputes: - Exploration Agreement and Oil Purchase Contract

• Deed Interpretation

• Surface Damages

• Tort claims by neighbors, including earthquakes

© 2015 Haynes and Boone, LLP 22

© 2015 Haynes and Boone, LLP

ϭϭ ϴͬϮϴͬϮϬϭϱ

Oklahoma – Contract Disputes

Cyanostar v. Chesapeake, (La. CoA 2013).

• Pursuant to the AMI provision in an Exploration Agreement, CHK offered Cyanostar and Penn Virginia a proportionate share of acreage CHK acquired within the AMI • Cyanostar elected to acquire its share, but Penn Virginia declined, and Cyanostar demanded a proportionate share of Penn Virginia’s share • Held, summary judgment affirmed, AMI was silent about the declined acreage scenario, would not read in “option that did not exist”

© 2015 Haynes and Boone, LLP 23

© 2015 Haynes and Boone, LLP

Oklahoma – Tort Claims & Earthquakes

Ladra v New Dominion, (Ok. June 30, 2015).

• Ladra inside her home when 5.0 earthquake caused 2-story fireplace to fall, causing her injuries • Ladra claimed oil and gas wastewater injection caused the earthquake, sued New Dominion and 25 John Does for negligence & absolute liability • Trial court dismissed, citing exclusive jurisdiction of Okl. regulatory commission • Held, district courts have exclusive jurisdiction over tort actions when regulated oil and gas operations are at issue, remanded for further proceedings

© 2015 Haynes and Boone, LLP 24

© 2015 Haynes and Boone, LLP

ϭϮ ϴͬϮϴͬϮϬϭϱ

Oklahoma – Tort Claims & Earthquakes

Cooper v New Dominion, (Dist. Ct. Feb., 2015).

• Cooper seeks class action status for property damages caused by earthquakes in Lincoln and 8 other Okl. counties • Petition cites 3 papers, including by USGS, purportedly correlating earthquakes and water disposal wells • Asserts claims for nuisance, trespass, negligence, and absolute liability

© 2015 Haynes and Boone, LLP 25

© 2015 Haynes and Boone, LLP

Questions or Comments?

© 2015 Haynes and Boone, LLP

ϭϯ 7LPRWK\00LOOHU 7 )

6KDUHKROGHU WPLOOHU#EDEVWFDOODQGFRP

¡ ¢ £ ¤ ¥ ¦ § ¨ © £

                                                     !       "   #       $   % &  '  

(

      )   )       $        #   #           #                           * +    %         

,

                  %             '                  "        -       % .    /     0   

                  ) 1        %     2 $      3     $   2        '  %       .    /        

(

!       4           "  $          % 5 $ $      % .    /     )    2 $              %      %    

          $   2                          $     0  $                 0       0                  0

              0      $         $  0            0              0 %       0   #            

,

      2 $      )   )                  2 $       #   #   $             0 3     %        0      

  $     0   2      0       0   '              3        ) 1         $   #      $        $             

                         0   '   0                   3 0     6       $ $             0           %

                 '         $           )

  )                 $               0   3                              6               ) 1    

  $                    0                 0  2 $           $          $     0   3            

  '    3         $        )

  )        $         .    /     "     &     &               ) 1        #       '         

         '       0                   %           0            $     0                  

          )

£ 8 9 : ¡ ¤ ; < =

7

  )               %    .    /     >  #       ? @ A A 3    & ) " )            ) 1     #     B ) - )

(

%    .    /     >  #             % !  3  ? @ C + )

¢ § E ¢ ¡ © ¨ £ < = ¥ ¥ F £ G ¤ <

D

(

  )                   .    /     "     &   0    >     "      -          %                

( (

"        -       % .    /     0    "  $          % 5 $ $      % .    /           >     "         

( (

 % 5 $ $     %      H         ) 1     #         '    %    &      % I  #              %          !  3

( (

        %    -  %               % .    /     ) 1      J        4    6 4              #       

(

 2    #          %                   !  3 H         )   )               '    %    -  %    

      J             H      4        '    %    5      5  '       5        )

(

    !       L I        )         '       K   

 KDPEHUV86$¶V$PHULFD¶V/HDGLQJ%XVLQHVV/DZ\HUV

(

       "        M + ? *                     "        M + ? N ) 1     '          O P Q R Q S T

U V W X Q Y S Z [ \ ] Q Y ^ _ V `    M + + A ) 1         '         a      .    /     "  $   !  3    )   )      

              %         '                     b '    

UDWHG ³$9 3UHHPLQHQW´ VFRULQJ  RXW RI  6

         6 1  ' '    4     #  3     "      )

6XLWH6XPPHUV6WUHHW&KDUOHVWRQ:9 ZZZEDEVWFDOODQGFRP

; E F 8 £ G ¤ < d ¡ ¢ ¢ < G £ G ¤ <

c c

3UHVHQWHU³/LWLJDWLRQ5HODWHGWRWKH'HYHORSPHQWRIWKH0DUFHOOXV6KDOH´:HVW9LUJLQLD&ROOHJHRI/DZ

e f g h i g j i g k l m k n o p q j r n h i f g s e t n u o m v h f g s w x s y z { { |

f }

e DXWKRUSUHVHQWHU³2LODQG*DV2SHUDWLRQVRQ3XEOLF/DQGVLQWKH0DUFHOOXV6KDOH5HJLRQ´(QHUJ\

n g q ~ i g m u n o l n  € f j g q n h i f g s  y g q ‚ g g j n o ƒ g v h i h j h m s „ m n r f o i g w f f q o n g q v s † ‚ s y z { { |

$XWKRU SUHVHQWHU ³,V ,W D 'HHS :HOO RU D 6KDOORZ :HOO DQG :KR&DUHV"´ (QHUJ\ DQG 0LQHUDO /DZ

€ f j g q n h i f g s  { v h ‚ g g j n o ƒ g v h i h j h m s ‚ m o i n ƒ v o n g q s € l s y z { z |

3UHVHQWHU ³2YHUYLHZ RI /HJDO ,VVXHV 5HODWHG WR 'HYHORSPHQW RI WKH 0DUFHOOXV 6KDOH´ $PHULFDQ

‚ v v f r i n h i f g f ‡ † m h u f o m j l n g q m g s w i g h m u l n g q ˆ m i g n u s ‰ f j v h f g s Š ‹ s y z z Œ |

$XWKRU SUHVHQWHU ³3ODQ IRU WKH :RUVW +RSH IRU WKH %HVW  7KH 5ROH RI /HJDO &RXQVHO RQ WKH &ULVLV 0DQDJHPHQW7HDP´(QHUJ\DQG0LQHUDO/DZ)RXQGDWLRQWK$QQXDO,QVWLWXWH2UODQGR)/

3UHVHQWHU ³3RVW 3URGXFWLRQ 'HGXFWLRQV´ $PHULFDQ $VVRFLDWLRQ RI 3HWUROHXP /DQGPHQ $QQXDO

~ m m h i g k s e t i r n k f s ƒ l s y z z  |

$XWKRU SUHVHQWHU ³%OXUULQJ WKH /LQHV %HWZHHQ 7RUW DQG &RQWUDFW 3XQLWLYH 'DPDJHV IRU %UHDFK RI

&RQWUDFW´'HIHQVH7ULDO&RXQVHORI:HVW9LUJLQLD$QQXDO0HHWLQJ

e f }

  ‘ ’ “ ” • – —

DXWKRU SUHVHQWHU ³ Ž  3RVWPRUWHP DQG $SSHDO´ (QHUJ\  0LQHUDO /DZ )RXQGDWLRQ

y  h t ‚ g g j n o ƒ g v h i h j h m s e t n u o m v h f g s ˆ e s y z z ˜ |

3UHVHQWHU³5R\DOW\/LWLJDWLRQ8SGDWH´:HVW9LUJLQLD2LO 1DWXUDO*DV$VVRFLDWLRQ6SULQJ0HHWLQJ

™ o n q m ˆ š u i g k v s w x s y z z ˜ |

› v m e f š n g i m v ‚ r u f v v h t m „ n h i f g e f j o q œ m n h $XWKRUSUHVHQWHU³:HVW9LUJLQLD)ORRG/LWLJDWLRQ/DQG}

5LVN´9ROXPH(QHUJ\ 0LQHUDO/DZ)RXQGDWLRQ$QQXDO,QVWLWXWH3URFHHGLQJV

‚ „ m  † u f  o m ‡ f u l n g q f  g m u v s l f k k m u v n g q 3UHVHQWHU ³7KH 6RXWKHUQ :HVW 9LUJLQLD )ORRG &DVHV} 7LPEHU%X\HUV´:HVW9LUJLQLD)RUHVWU\$VVRFLDWLRQ

3UHVHQWHU³,PSOLHG/HDVH&RYHQDQWV$PHULFDQ$VVRFLDWLRQRI3HWUROHXP/DQGPHQ´$SSDODFKLDQ/DQG

ƒ g v h i h j h m s y z z y |

6XLWH6XPPHUV6WUHHW&KDUOHVWRQ:9 ZZZEDEVWFDOODQGFRP 6TH LAW OF SHALE PLAYS CONFERENCE

Litigation Update – Hot Topics and Future Disputes

in West Virginia

Timothy M. Miller, Esquire [email protected] BABST, CALLAND, CLEMENTS AND ZOMNIR, P.C. BB&&T Square 300 Summer Street, Suite 1000 Charleston, WV 25301 681-265-1361

Shannon DeHarde, Esquire [email protected] BABST, CALLAND, CLEMENTS AND ZOMNIR, P.C. Two Gateway Center, 6th Floor Pittsburgh, PA 15222 (412) 394-5432

{B2187484.2}

6TH LAW OF SHALE PLAYS CONFERENCE

Litigation Update – Hot Topics and Future Disputes

in West Virginia

CONTENTS

I. Introduction...... 1

II. Hot Topics and Trends ...... 1

A. Nuisance claims ...... 1

B. Private Property Rights Movement...... 1

C. Deep Well Spacing and Forced Pooling ...... 2

D. Failure to Diligently Develop: Dual Purpose Leases...... 2

III. Case Summaries...... 3

A. Negotiation of Leases ...... 3

Barber v. Magnum Land Services, LLC ...... 3

B. Operator’s Surface Rights & Implied Duty to Develop ...... 3

Adams v. Cabot Oil & Gas Corp.,...... 3

Smith v. Chestnut Ridge Storage, LLC ...... 4

Cunningham Energy LLC v. Ridgetop Capital, II` ...... 5

C. Term & Extension of Lease...... 6

Dwyer v. Range Resources – Appalachia, LLC ...... 6

Bissett v. Chesapeake Appalachia LLC...... 7

D. Waiver...... 8

Stricklin v. Fortuna Energy, Inc...... 8

{B2187484.2}

I. Introduction.

Drilling activity has slowed down, but litigation seems to continue unabated. As in past years, much of the litigation falls in four main categories: 1) “lease busting”; efforts to terminate or re-negotiate the terms of a lease, or prevent the extension or renewal of a lease; 2) surface owner denials of access and property damage claims; 3) partition and missing and unknown heirs actions to obtain judicial approval for a lease in cases where 100% of the mineral owners will not lease or cannot be located1; and, 4) royalty disputes.2

II. Hot Topics and Trends.

Add to the four litigation “mainstays” an uptick in claims for the following:

A. Nuisance Claims. Adjoining and nearby property owners are alleging that odors, noise, road traffic and other construction activities have resulted in the unreasonable interference with the use and enjoyment of property, annoyance and inconvenience and emotional distress. As a general rule, a fair test as to whether a particular use of real property constitutes a nuisance is the reasonableness or unreasonableness of the use of the property in relation to the particular locality involved, and ordinarily such a test to determine the existence of a nuisance raises a question of fact. Sticklen v. Kittle, 287 S.E.2d 148, 149 (W. Va. 1981). In Sticklen, the court held it was error to dismiss a claim for nuisance caused by construction activities related to the building of a school where there were no allegations of negligence, because “whether a particular use of real property constitutes a nuisance is the reasonableness or unreasonableness of the use of the property in relation to the particular locality involved.” Id. at 161. Thus, despite the fact an operator has a legal right to construct a well site, compressor station or other surface facility, adjoining landowners can claim the activity is not reasonable in relation to use and enjoyment of their land. Litigation of these cases requires a close examination of the facts and competing land uses in the locality. B. Private Property Rights Movement. An abundant supply of gas and the need for infrastructure to process and transport it has resulted in much publicity about proposed pipeline projects to ship gas out of state. A number of environmental and property rights activists have been mobilizing to oppose any such development. It is an open question at this time whether the eminent domain laws of West Virginia will

1 West Virginia generally does not allow forced pooling except in the case of deep wells. It is therefore necessary in some cases to seek partition to divide property or compel the sale of the mineral interest for shallow formations such as the Marcellus, or to obtain a judicial sale of the interest of missing and unknown owners. W. Va. Code § 37-4-1 (Partition); W. Va. Code § 55- 12A-1 (Missing or Unknown Owners). 2 Royalty litigation is being covered in the stand alone presentation, “Recent Developments in Royalty Litigation in the Shale Plays.”

{B2187484.2} 1

allow the acquisition of land by condemnation for the numerous pipeline projects needed to move the gas to markets outside West Virginia, and the result will likely require a case-by-case analysis of whether the proposed development is for “public use”. C. Deep Well Spacing and Forced Pooling. The number of permit applications for the drilling of Utica wells is on the rise. The Utica is below the top of the Onandaga and by statutory definition considered a “deep” formation under West Virginia law. W. Va. Code § 22C-9-2(a)(12). The Oil and Gas Conservation Commission of West Virginia has jurisdiction to grant exceptions to the requirement that all deep wells must be at least 3,000 feet from the nearest deep well, and compel forced pooling of any unleased interests. W. Va. Code § 22C-9-7. The Commission is generally agreeable to granting spacing exceptions so laterals can be drilled from a common drill pad, but is more cautious about forced pooling requests in light of the fact it is a divisive and politically charged issue in West Virginia. D. Failure to Diligently Develop; Dual Purpose Leases. Mineral owners subject to existing leases held by production from vertical wells, or in the case of dual purpose leases, held by storage or protection of storage formations, are testing whether the operator can be compelled to drill horizontal, unconventional wells, or if the storage rights are “severable” from the production rights. Whether West Virginia law allows the production rights to be severed from the storage rights where a unified lease clearly states the lease is held in the secondary term by production or storage is currently on appeal to the Fourth Circuit Court of Appeals. K&D Holdings, LLC v. Equitrans, L.P., EQT Production Co., No. 15-166 (4th Circ.).3

Below are summaries of several opinions from the West Virginia Supreme Court of Appeals and the United States District Courts of West Virginia. These cases represent the issues which are arising with more frequency as gas development continues to grow throughout West Virginia. Please note that these summaries provide only a brief overview of the applicable cases with a particular focus on the oil and gas issues addressed therein. Thus, the cases identified below may have included issues and legal arguments in addition to those highlighted in the individual summaries.

3 Contrast the District Court’s interpretation of West Virginia law with the holding of the West Virginia Supreme Court of Appeals in Smith v. Chestnut Ridge Storage, LLC, No. 2014 WL 6607569, 2014 WL 6607569 (W. Va. Nov. 21, 2014) (memorandum decision), discussed in Section III.B.

{B2187484.2} 2

III. Case Summaries.

A. Negotiation of Leases

Barber v. Magnum Land Services, LLC, No. 1:13CV33, 2014 WL 5148575 (N.D.W.Va. Oct. 14, 2014)

Magnum Land Services acquired leases for approximately 7500 acres in Preston County, West Virginia. All of the leases contained the same material terms: the lessor would receive a twenty-five dollar per acre bonus with a one-eighth royalty on produced gas. Magnum then assigned those leases to Belmont Resources, LLC, who then sold the leases at a premium to Enerplus Resources Corporation. The lessors realized that they had received extremely low bonus payments as compared to other landowners in neighboring counties and filed suit alleging: (i) that the leases were unconscionable; and (ii) that Magnum had fraudulently induced them into the leases by having their landmen advise lessors that even if they did not sign the lease the gas could still be collected by drilling wells on neighboring properties.

Upon lessors’ motion for summary judgment, the United States District Court for the Northern District of West Virginia dismissed lessors’ claims of fraudulent inducement because, according to the court, even if the landmen had said that they could retrieve the lessors’ gas without a lease through the use of deviated or horizontal wells, the lessors’ purported reliance on those statements was unjustified because “no reasonable person would accept such a representation as true and sign the lease without first looking into the validity of the statement or consulting someone knowledgeable in the oil and gas field.” The court further held that the leases were not unconscionable because: (i) a one-eighth royalty is standard within the industry; and (ii) there is no per se inequity simply because Belmont was able to sell the leases at a premium compared to the bonus payments accepted by the lessors. This case is currently on appeal in the Fourth Circuit.

Although the court dismissed plaintiffs’ fraudulent inducement claims, in the wake of Barber operators should make an effort to take note of the language and methods used by their landmen to ensure that no fraudulent procedures are being used. Operators should also be aware that there is no per se rule that an undesirably low bonus payment will invalidate the lease as unconscionable.

B. Operator’s Surface Rights & Implied Duty to Develop

Adams v. Cabot Oil & Gas Corp., No. 13-1299, 2014 WL 6634396 (W. Va. Nov. 24, 2014)

Plaintiff-lessors entered into a lease with Cabot which granted Cabot the rights to explore, drill, and build roads on the lessor’s property. The parties then executed a “Certificate

{B2187484.2} 3 of Consent and Easement” wherein Cabot paid lessor $5000 as damages in advance of a proposed well site and access road which Cabot was going to construct on lessor’s property. Several years later, Cabot had to replace the access road and lessor objected and denied Cabot access to his property. Cabot filed a complaint for declaratory judgment and injunctive relief seeking an order declaring that it has the right to enter lessor’s land and “use the surface in any manner reasonably necessary to the use and development of the mineral estate…”

The circuit court granted Cabot’s motion for summary judgment on the basis that: (i) the lease granted Cabot “the express right to produce the mineral estate and to build roads and other things which are necessary, useful or convenient to said production”; and (ii) the owner of the underlying mineral estate has the right to use the surface in such manner and with such means as would be necessary for the enjoyment of the mineral estate. On appeal, the Supreme Court of Appeals of West Virginia affirmed on the same grounds.

Under Adams, operators should be aware that even absent express language allowing the lessee’s use of the surface, operators are entitled to the reasonable use of the surface for the construction of reasonably necessary items such as access roads or well pads.

Smith v. Chestnut Ridge Storage, LLC, No. 2014 WL 6607569, 2014 WL 6607569 (W. Va. Nov. 21, 2014) (memorandum decision)4

In 1987, the lessors’ predecessor in interest entered into a three-year lease with lessee Chestnut Ridge’s predecessor in interest which stated, “[i]t is agreed that Lessee may drill or not drill on said land as it may elect…” (emphasis added). The parties also entered into a Gas Storage Addendum, whereby lessees were granted the exclusive right to store gas in “any depleted oil or gas stratum underlying the Lands.” In 2007, Chestnut Ridge applied for and was granted a Federal Energy Regulatory Commission certificate authorizing construction and operation of a natural gas storage field on the lessors’ property. Lessors filed suit against Chestnut Ridge alleging: (i) that under the implied duty to develop Chestnut Ridge was obligated to develop the Marcellus Shale strata; and (ii) that Chestnut Ridge had breached the lease by obtaining the FERC certificate to store gas on undepleted portions of the property. The circuit court denied plaintiffs’ motion for summary judgment and Chestnut Ridge appealed.

The West Virginia Supreme Court of Appeals held that the lessors had waived any implied duty to develop the Marcellus Shale strata because the lease language explicitly stated that the lessee “may or may not drill...as it may elect.” The Court further held that development of the Marcellus Shale strata was inconsistent with the terms of the Gas Storage Addendum because, at the time the Addendum was entered into, the Marcellus Shale strata was not being developed and marketed within the industry but instead was generally understood to be used as a caprock to seal in the stored gas. Finally, held that Chestnut Ridge had not violated the lease by

4 Under West Virginia law, memorandum decisions may be cited as legal authority but the citation must indicate that the opinion is a memorandum opinion. See W.Va.R.C.P. No. 21(e).

{B2187484.2} 4 obtaining the FERC certificate because, under the industry definition of “depleted,” some gas would be left in the storage strata to provide a cushion for the stored gas and, therefore, Chestnut Ridge did not have to extract every drop of gas prior to receiving a certificate for storage.

Following Smith, operators should be aware that under West Virginia law they may waive the implied duty to develop by including language expressly reserving the right to elect whether to drill or not. Storage operators should be aware that if the lease does not define depleted the court will apply the industry standard, which allows for remaining gas to serve as a cushion for the stored gas.

Cunningham Energy LLC v. Ridgetop Capital II, LP, 5:13-CV-78, 2015 WL 136624 (N.D. W. Va. Jan. 9, 2015)

Plaintiff-lessee Cunningham entered into two separate leases with defendant-lessor Ridgetop. Pursuant to lease language which stated that lessee “agrees to pay as Delay Rental, the rate of Four Hundred Dollars ($400.00) per net mineral acre owned by Lessor under this agreement per year, paid up,” Cunningham paid Ridgetop $382,100 for the leases at signing. The parties also agreed to an addendum which contained the following provision:

DRILLING COMMITMENT: Lessee hereby commits to drill two (2) ‘horizontal’ Marcellus Shale wells within the first twenty four (24) months of the effective date of this agreement, and upon their completion, if it appears that gas is present in commercial quantities, Lessee commits to drill two (2) additional horizontal wells within twelve (12) months of the completion of the initial wells drilled.

Notably, neither the provision nor the addendum defined the term “drill.” However, the definition of operations contained in the lease stated:

“drilling (which includes applying for permits, the commencement of clearing operations on or adjacent to the well site area such as the removal of trees, the construction of access roads in preparation for drilling, the delivery of heavy equipment, and the use of bona fide good faith continuing efforts to diligently prepare the physical well site area as required prior to the commencement of actual drilling activities).”

Cunningham began preparing its drilling permits in March 2013. In May, Cunningham retained a surveyor to survey, map, and stake the well locations. In June, the permits were ultimately denied because Cunningham failed to submit the required bond. On July 1, 2013, Ridgetop notified Cunningham that it was forfeiting the leases because Cunningham had violated the drilling commitment.

The United States District Court for the Northern District of West Virginia ultimately held that Cunningham had violated the drilling commitment by not actually boring holes into the

{B2187484.2} 5 ground. In support of its holding, the Court determined that the sub-definition of “drilling” contained in the lease’s definition of “operations” was not the controlling definition because other provisions within the lease distinguished between a well which is “commenced” versus a well which is “drilled,” and to apply the sub-definition to the addendum would be to make the distinction unnecessary because the sub-definition was identical to the industry definition of “commenced,” which is a violation of basic contract principles. The court also drew a distinction between the terms “drilling” and “drilling operations,” holding that “drilling” requires actual boring into the ground whereas “drilling operations” is broader and more inclusive of other precursor activities. The Court further held that, notwithstanding the lease designation as delay rentals, the $382,100 payment constituted a bonus payment as opposed to delay rentals because Cunningham had an express obligation to drill and, therefore, the payment could not constitute delay rentals, which are typically made to avoid drilling while still holding the lease. Therefore, because the parties had created an express obligation to develop by including the drilling commitment provision, the lease did not allow Cunningham to secure the lease for the primary term without drilling. Finally, the court determined that although Cunningham had violated the drilling requirement, under West Virginia law, the lease remained valid because there was no express reservation of power for the lessor to forfeit the lease upon breach by the lessee.

After Cunningham, operators should be conscious of carefully defining terms contained in the lease to ensure that both parties are aware what activities will secure the leasehold, especially considering that the default definitions which will apply may not be favorable to the industry. Moreover, operators should carefully consider whether to include express forfeiture language within the lease because, under West Virginia law, the absence of such language will allow the lease to remain valid notwithstanding a breach by the lessee.

C. Term & Extension of Lease

Dwyer v. Range Resources-Appalachia, LLC, No. 5:14CV21, 2015 WL 366441 (N.D. W. Va. Jan. 26, 2015)

Lessees entered into identical leases with lessor Range Resources, all of which contained a habendum clause which stated:

“[t]his lease shall continue in force and the rights granted hereunder be quietly enjoyed by lessee for a term of Five (5) Years and so much longer thereafter as oil, gas, and/or coalbed methane gas or their constituents are produced…”

Paragraph 22 of the leases further stated “[r]egardless of any language to the contrary, this is a paid up lease for a period of Five (5) years.” Lessors filed suit alleging: (i) that the leases were void for lack of a definite term; and (ii) Paragraph 22 expressly limits the lease to a 5 year term and, therefore, the leases expired after 5 years notwithstanding the habendum clause. Chesapeake moved for summary judgment claiming that the unambiguous language of the lease allowed for an extension beyond the initial five year term.

{B2187484.2} 6

The United States District Court for the Northern District of West Virginia ultimately held that the habendum clause, which contained typical industry language, clearly established the standard “primary” and “secondary” terms and, therefore, a definite term had been established. The Court further held that the two clauses did not conflict with each other and instead the second clause merely ensured that lessees did not have to make any further payments to secure its interest for the primary five year term.

In the wake of Dwyer, it is clear that the West Virginia courts will recognize and uphold the standard industry habendum clause language. However, operators should carefully consider the utility of using multiple clauses to describe the lease term because the court will consider all of the lease terms as a whole and, therefore, the clauses must not contain conflicting language.

Bissett v. Chesapeake Appalachia LLC, No. 5:13-CV-20, 2014 WL 1689928 (N.D. W. Va. April 29, 2014)

Plaintiff-lessor entered into a lease with defendant-lessee in July 2007. The lease contained a habendum clause for a primary term of five years, with a provision for an extension into a secondary term only if oil, gas, or constituents of either are being produced or are capable of being produced, or in the event lessee explores or searches for the minerals as provided in the leases. The lease also contained a provision, Paragraph 19, which stated:

In consideration of the acceptance of this lease by the Lessee, the Lessor agrees for himself and his heirs, successors and assigns, that no other lease for minerals covered by this lease shall be granted by the Lessor during the term of this lease or any extension or renewal thereof granted to the Lessee herein. Upon expiration of this lease and within sixty (60) days thereinafter, Lessor grants to Lessee an option to extend or renew under similar terms a like lease.

Prior to the expiration of the lease, Chesapeake executed and recorded a Notice of Extension of Oil and Gas Lease and tendered payment to the lessor. Lessors filed suit against lessee claiming that Chesapeake had failed to comply with Paragraph 19 of the lease and, therefore, the lease had expired. Chesapeake filed a counterclaim seeking declaratory judgment that Paragraph 19 allowed it to extend the lease at its sole option at any time up to sixty days after the expiration of the primary term and that Chesapeake had complied therewith.

Upon cross-motions for summary judgment, the United States District Court for the Northern District of West Virginia ultimately held that by using the term “extend” in Paragraph 19, the parties had agreed that Chesapeake could unilaterally extend the existing lease for an additional term. The court further held that Chesapeake’s decision to extend the lease prior to its expiration did not invalidate the extension because the expiration language in Paragraph 19 was not material to the extension provision and, therefore, failure to comply with that language did not render the extension invalid. This case is currently on appeal in the Fourth Circuit.

{B2187484.2} 7

Post-Bissett, operators should be aware that by including a right to “extend” like that included in the lease at issue they will ensure themselves a unilateral option to extend the lease for an additional term. Further, operators should also note that they may exercise the extension option early in an effort to quickly secure an additional term.

D. Waiver

Stricklin v. Fortuna Energy, Inc., No. 5:12CV8, 2014 WL 2619587 (N.D. W. Va. June 12, 2014)

Plaintiff-lessors alleged that defendant-lessees breached the leases by assigning their interests therein to Range Resources-Appalachia, LLC without first obtaining the lessors’ consent. Paragraph 22 of the leases stated: “If the interest of either Lessor or Lessee is assigned, and the right to assign in whole or in part is expressly permitted, all rights, duties and liabilities under this Lease shall inure to the benefit of and be binding on the assignee and the assignee’s respective heirs, executors, administrators, successors and assigns.” The lease also contained a provision requiring the lessors to provide written notification of any alleged breach by lessee prior to initiating a lawsuit.

Several assignees moved for summary judgment alleging that the lessors had waived their rights to a breach of contract claim because they had not provided lessees with the written notification of breach which was required under the terms of the lease. The court ultimately held that the lessors had waived their breach of contract claim by failing to provide lessees with the required written notification of breach. Therefore, operators should consider including language which requires lessors to notify the operator of any alleged breach prior to the institution of a lawsuit related thereto.

After Stricklin, operators should be aware that they can include language which specifically requires lessors to notify them of any potential litigation prior to the initiation of a lawsuit. Inclusion of such language could not only provide operators an opportunity to settle claims prior to litigation but, as in Stricklin, it could also act as a waiver provision if lessors fail to comply with the language.

{B2187484.2} 8

5-HIIUH\3ROORFN Senior of Counsel [email protected]

3UDFWLFH)RFXV

 Commercial and Business Litigation  Appeals

3URIHVVLRQDO([SHULHQFH

Jeff specializes in general business litigation, including contracts, insurance, corporate, real estate, and commercial disputes. His practice also includes litigation involving trade secret theft, unfair competition, and non-competition agreements.

From 2001-2005, he served as General Counsel for Metaldyne Corporation. Metaldyne is a manufacturer of high quality steel components and sub-assemblies for the automobile industry, with facilities in the United States and throughout the world.

In over 38 years as a litigator, he has tried numerous corporate and personal injury 3KRQH cases in state and federal courts and has represented businesses in many 216-348-5715 arbitrations.

/RFDWLRQV Jeff co-chairs the firm's Pro Bono and Public Service Committee and Appellate Practice Committee. Cleveland 600 Superior Avenue, (GXFDWLRQ East Suite 2100 Cleveland, OH 44114  Northeastern University School of Law, J.D. (1976)  Harvard University, M.T.S. (1971)  DePauw University, B.A. (1968)

6WDWH$GPLVVLRQV

 Michigan  Ohio

&RXUW$GPLVVLRQV

 U.S. District Court for the Northern District of Ohio  U.S. District Court for the Southern District of Ohio  U.S. District Court for the Northern District of Illinois  U.S. District Court for the Eastern District of Michigan  U.S. Bankruptcy Court for the Eastern District of Michigan  U.S. Court of Appeals for the Sixth Circuit  U.S. Court of Appeals for the Third Circuit  U.S. Supreme Court

3URIHVVLRQDO$VVRFLDWLRQV

 Cleveland Metropolitan Bar Association  Trial Counsel in Disciplinary Proceedings before the Board of Commissioners on Grievances and Discipline

Page 1 5-HIIUH\3ROORFN

 Ohio State Bar Association  American Bar Association  Alternate Dispute Resolution Panel of the United States District Court for the Northern District of Ohio, Eastern Division  Ohio Eighth District Judicial Conference (Life Member)  Adjunct Professor, Cleveland-Marshall College of Law (1994-2000)  American Arbitration Association (Member), National Roster of Neutrals

&RPPXQLW\$FWLYLWLHV

 Deaconess Community Foundation, Trustee  Magnolia Clubhouse, Inc., Trustee  National Alliance on Mental Illness (Cleveland Chapter), Trustee  Recovery Resources, Trustee  Woodruff Foundation, Trustee  NAACP Civil Rights Champion Award, 2012

Page 2 OHIO DORMANT MINERAL ACT Supreme Court of Ohio

R. Jeffrey Pollock Beth I. Gillin McDonald Hopkins LLC 600 Superior Avenue Cleveland, Ohio 44114 [email protected] [email protected]

6th Law of Shale Plays Conference September 10-11, 2015 Pittsburgh, Pennsylvania

{5607334:} TABLE OF CONTENTS

SUMMARY OF THE PRIMARY ISSUES REGARDING THE DMA BEFORE THE SUPREME COURT OF OHIO ...... 4

PROPOSITIONS OF LAW OF DMA CASES PENDING BEFORE THE SUPREME COURT OF OHIO...... 8

SUMMARIES OF THE DMA CASES BEFORE THE SUPREME COURT OF OHIO...... 13

Dodd v. Croskey...... 13 Supreme Court of Ohio Slip Opinion No. 2015-Ohio-2362

Chesapeake Exploration v. Buell...... 15 Supreme Court of Ohio, Case no. 2014-0067

Corban v. Chesapeake Exploration ...... 18 Supreme Court of Ohio, Case no. 2014-0804

Walker v. Shondrick-Nau...... 19 Supreme Court of Ohio, Case no. 2014-0803

Swartz v. Householder ...... 22 Supreme Court of Ohio, Case no. 2014-1208

Eisenbarth v. Reusser...... 23 Supreme Court of Ohio, Case no. 2014-1767

Dahlgren v. Brown Farm Properties, LLC...... 25 Supreme Court of Ohio, Case no. 2014-1655

Taylor v. Crosby...... 26 Supreme Court of Ohio, Case no. 2014-1886

{5607334:} 2 Tribett v. Shepard...... 27 Supreme Court of Ohio, Case no. 2014-1966

Farnsworth v. Burkhart ...... 28 Supreme Court of Ohio, Case no. 2014-1909

APPENDIX

1989 Ohio Dormant Mineral Act

2006 Ohio Dormant Mineral Act

{5607334:} 3 SUMMARY OF THE PRIMARY ISSUES REGARDING THE DMA BEFORE THE SUPREME COURT OF OHIO

Ohio R.C. 5301.56, included as part of Ohio’s Marketable Title Act (R.C. 5301.47 through 5301.56) and commonly referred to as the Dormant Mineral Act (“DMA”), governs the preservation and abandonment of mineral interests which have been severed from the surface lands. The DMA provides generally that mineral interests may be preserved upon the occurrence of certain events (referred to as “Savings Events”) enumerated at RC 5301.56(B)(3). Savings Events “include: (i) the mineral interest has been the subject of a title transaction; (ii) actual production from the mineral interests or lands pooled or unitized with those interests; (iii) the usage of the mineral interests for underground storage; (iv) the issuance of a drilling permit to the holder of the mineral interests; (v) the creation of a separate tax listing for the mineral interests; and (vi) the filing of a claim by the holder of the mineral interests to preserve those interests.

The DMA was originally enacted in 1989 and then substantially amended in 2006. The original 1989 statute included no explicit provision requiring that a mineral holder be given notice of a claim of abandonment by the surface owner. The 2006 amendments to the DMA (the “2006 Amendments”) adopted explicit procedures which required notice by the surface owner to a holder and clarified a specific right of and mechanism for the holder to preserve the mineral interest.

The 1989 DMA preserves the interest of the mineral holder if the enumerated Savings Events have occurred “within the preceding twenty (20) years.” R.C. 5301.56(B)(1)(c). The 1989 statute then states that if none of the enumerated Savings Events has occurred within that time, the mineral interest “shall be deemed abandoned and vested in the owner of the surface . . .” R.C. 5301.56(B)(1).

In 2006, the DMA was amended to establish a mechanism whereby the surface owner is required to give notice to the mineral holder “by certified mail or, under certain circumstances, by publication” of the intent to declare the mineral interest abandoned. R.C. 5301.56(E)(1). The mineral holder then has the right to file a claim to preserve the mineral interest or an affidavit that any of the Savings Events has occurred within the 20 years immediately preceding the date on which notice was served or published. R.C. 5301.56(H)(1).

With the advent of the Utica shale play and the increased value of mineral interests in eastern Ohio, the DMA has spawned substantial litigation. To date, the Supreme Court of Ohio has decided only one case regarding the interpretation of this statute, Dodd v. Croskey, 2055- Ohio-2362. Nine cases regarding the DMA are still pending in the Supreme Court of Ohio, with six of those cases stayed pending the decision in one or more of the other major cases.

The primary issues before the Supreme Court of Ohio are summarized as follows:

1. Is the 1989 DMA Self-Executing?

{5607334:} 4 Is the 1989 DMA self-executing such that the mineral interests are automatically abandoned and vested with the surface estate if none of the Savings Events occurred within the “preceding 20 years.”

The surface owners answer that question in the affirmative, arguing the plain language of the statute. The surface owners assert that the 1989 DMA included a three year grace period within which the mineral holder could have preserved their interests, thereby providing notice and ample opportunity to preserve the mineral interest after the enactment of the statute. R.C. 5301.56(B)(2). The surface owners also assert that the procedural safeguards in the 2006 amendments are not applicable to protect mineral rights which had been previously abandoned under the original 1989 DMA.

The mineral holders argue that the 1989 DMA contained ambiguities which were resolved by the 2006 amendments. They argue that even if there were no Savings Events within the “preceding 20 years,” the surface owner nonetheless was required under the 1989 DMA to initiate an action to quiet title or for declaratory judgment before the mineral rights are abandoned. They assert that the 2006 amendments clarified a procedure by which the surface owner would provide notice and the mineral holder could preserve the mineral interest, even if there had been no prior Savings Events.

This is the most significant issue regarding the DMA before the Supreme Court, with the issue to be decided in Walker v. Shondrick-Nau, case no. 2014-0803.

2. Is the 20 Year Period Fixed or “Rolling”?

The 1989 DMA provides that the mineral rights are deemed abandoned and vested in the surface owner if none of the Savings Events have occurred “within the preceding 20 years . . .” R.C. 5301.56(B)(1)(c). The statutory language raises the question – 20 years preceding what? The surface owners argue that it is a “rolling” 20 year period which requires the mineral holder to establish the Savings Event within 20 years preceding any date between the enactment of the statute, March 22, 1989 (or within the statutory three year grace period) and June 30, 2006 (the enactment of the 2006 amendments). Under this theory, a mineral holder would have to re- establish a Savings Event potentially on two different occasions – the earliest being 1969 (20 years prior to enactment) and then again 20 years later in 1989. Twenty years after 1989 would take the date to 2009, three years after the enactment of the 2006 amendments. The 2006 amendments provide that the Savings Event must occur within 20 years preceding the date on which the surface owner must give notice of intent to declare the mineral interest abandoned. R.C. 5301.56(H)(1)(b).

The mineral holders argue that the mineral interest is not abandoned if any Savings Event occurs on a one time basis within 20 years prior to the enactment of the 1989 DMA, within the three year statutory grace period, or within 20 years prior to the date a complaint is filed.

3. Whether a Severed Oil and Gas Mineral Interest is the “Subject Of” any Title Transaction Which Identifies the Recorded Document Creating that Interest, Even if the Severed Mineral Interest is not Actually Transferred.

{5607334:} 5 The most common of these Savings Events occurs if the “mineral interest has been the subject of a title transaction” recorded or filed with the county recorder in the county where the property is located. RC 5301.56(B)(3)(a) states in pertinent part as follows:

(B) Any mineral interest held by any person, other than the owner of the surface of the lands subject to the interest, shall be deemed abandoned and vested in the owner of the surface of the lands subject to the interest if the requirements established in division (E) of this section (the Notice of Intent) are satisfied and none of the following applies:

(3) Within the twenty years immediately preceding the date on which notice is served or published under division (E) of this section, one or more of the following has occurred:

(a) The mineral interest has been the subject of a title transaction that has been filed or recorded in the office of the county recorder of the county in which the lands are located.

The term title transaction is defined in the Marketable Title Act to mean “any transaction affecting title to any interest in land . . .” R.C. 5301.47(F). When inserting that definition into the language in R.C. 5301.56(B)(3)(a), the Savings Event occurs when:

The mineral interest has been the subject of any transaction affecting title to any interest in land.

The mineral holders argue that a transfer of the surface estate which specifically references a prior severed oil and gas mineral interest constitutes a Savings Event based upon the legislative history, principals of statutory construction, and referencing R.C. 5301.49 of the Marketable Title Act. The surface owners argue that a severed oil/gas mineral interest is not the subject of any title transaction involving only the surface estate, even if the transferring recorded document makes specific reference to a prior oil/gas reservation. The surface owners argue that a Savings Event occurs only in the event of a transfer or reservation of the oil/gas mineral interest which itself is the subject of the transfer.

Many of the oil and gas producers and the State of Ohio have filed amicus briefs in the pending cases, lining up on both sides of the issues.

The following parties have filed amicus briefs in support of the surface owners:

! State of Ohio ! Gulfport Energy Corporation ! Paloma Resources, LLC ! Protege Energy III, LLC ! Jeffco Resources, Inc. ! Murray Energy Corporation

{5607334:} 6 The following parties have filed amicus briefs in support of the mineral holders:

! Bedway Land & Minerals Company ! Ohio Oil and Gas Association ! Chesapeake Exploration, L.L.C. ! Eclipse Resources Corporation

{5607334:} 7 PROPOSITIONS OF LAW OF DMA CASES PENDING BEFORE THE SUPREME COURT OF OHIO

Phillip Dodd et al. v. John Croskey et al. Case Number 2013-1730

Proposition of law:

Ohio Rev. Code § 5301.56(8)(1) requires a showing by a party claiming the preservation of a prior mineral interest of a "savings event" that occurred in the 20 years prior to the notice being served and not a "savings event" after the date of the notice being served.

Question accepted sua sponte:

Does a transfer of the surface that specifically references the severed mineral interest qualify as a "title transaction?"

Oral arguments were held on August 20, 2014. Opinion issued June 18, 2015.

Chesapeake Exploration, L.L.C. v. Kenneth Buell et al. Case Number 2014-0067 (certified questions)

Certified questions of state law:

1. Is the recorded lease of a severed subsurface mineral estate a title transaction under the Ohio Dormant Mineral Act, Ohio Rev. Code§ 5301.56(B)(3)(a)?

2. Is the expiration of a recorded lease and the reversion of the rights granted under that lease a title transaction that restarts the 20-year forfeiture clock under the ODMA at the time of the reversion?

Oral arguments were held on August 20, 2014.

{5607334:} 8 Hans Michael Corban v. Chesapeake Exploration, L.L.C., et al. Case Number 2014-0804 (certified questions)

Certified questions of state law:

1. Does the 2006 version or the 1989 version of the ODMA apply to claims asserted after 2006 alleging that the rights to oil, gas and other minerals automatically vested in the surface land holder prior to the 2006 amendments as a result of abandonment?

2. Is the payment of a delay rental during the primary term of an oil and gas lease a title transaction and "savings event" under the ODMA?

Oral arguments were held on May 6, 2015.

Jon Walker, Jr. v. Patricia J. Shondrick-Nau, Executrix of the Estate of John R. Noon and Successor Trustee of the John R. Noon Trust Case Number 2014-0803

Propositions of law:

1 The 2006 version of the DMA is the only version of the DMA to be applied after June 30, 2006, the effective date of the amendments.

2. To establish a mineral interest as "deemed abandoned" under the 1989 version of the DMA, the surface owner must have taken some action to establish abandonment prior to June 30, 2006. In all cases where a surface owner failed to take such action, only the 2006 version of the DMA can be used to obtain relief.

3. To the extent the 1989 version of the DMA remains applicable, the 20-year look-back period shall be calculated starting on the date a complaint is filed which first raises a claim under the 1989 version of the DMA.

4. For purposes of Ohio Rev. Code§ 5301.56(B)(3), a severed oil and gas mineral interest is the "subject of" any title transaction which specifically identifies the recorded document creating that interest by volume and page number, regardless of whether the severed mineral interest is actually transferred or reserved.

5. Irrespective of the savings events in Ohio Rev. Code§ 5301.56(B)(3), the limitations in Ohio Rev. Code § 5301.49 can separately bar a claim under the DMA.

6. The 2006 version of the DMA applies retroactively to severed mineral interests created prior to its effective date.

Oral arguments were held June 23, 2015.

{5607334:} 9 Dan Swartz, et al. v. Jay Householder, et al. Case Number 2014-1208

Propositions of law:

1. The 1989 version of the Dormant Mineral Act does not apply after the effective date of the 2006 version of the Dorman Mineral Act.

2. In order for a mineral interest to vest under the 1989 version of the Dormant Mineral Act, the surface owner must take some action in order to establish abandonment prior to the effective date of the 2006 Dormant Mineral Act.

3. The 2006 DMA operates retrospectively and applies to severed mineral interests created before its effective date.

Leland Eisenbarth, et al. v. Dean Reusser, et al. Case Number 2014-1767

Propositions of law:

1. The 1989 version of DMA was prospective in nature and operated to have a severed oil and gas interest "deemed abandoned and vested in the owner of the surface" if none of the savings events enumerated in Ohio Rev. Code § 5301.56(B) occurred in the 20-year period immediately preceding any date in which the 1989 DMA was in effect.

2. Assuming, arguendo, that the 1989 DMA operated on a "fixed" 20-year look-back period from the date of enactment, an oil and gas lease is not a "title transaction" within the meaning of Ohio Rev. Code§ 5301.47(F) and Appellees' interest has nonetheless been abandoned.

Ronald Dahlgren, et al. v. Brown Farm Properties LLC, et al. Case Number 2014-1655

Propositions of law:

1. The 2006 amendment of Ohio's "dormant mineral" statute was remedial in nature and intended to apply to facts occurring before its enactment. In suits filed after June 30, 2006 (the effective date of the amendment), courts should apply the new version of the statute, rather than the old version.

2. Under the 1989 version of Ohio's "dormant mineral" statute, the 20-year dormancy period is measured from the date suit was commenced to determine title to the minerals.

{5607334:} 10 Benjamin Taylor, et al. v. Donald Crosby, et al. Case Number 2014-1886

Proposition of law:

1. The 1989 DMA is prospective in nature and operates using a rolling application of the phrase, “preceding twenty years.”

Vernon Tribett, et al. v. Barbara Shepherd, et al. Case Number 2014-1966

Propositions of law:

1. The 2006 version of the DMA is the only version of the DMA to be applied after June 30, 2006 (the effective date of said statute) because the 1989 version of the DMA was not self- executing.

2. To establish a mineral interest as "deemed abandoned" under the 1989 version of the DMA, the surface owner must have taken some action to establish abandonment prior to June 30, 2006. In all cases where a surface owner failed to take such action, only the 2006 version of the DMA can be used to obtain relief.

3. Interpreting the 1989 version of the DMA as "self-executing" violates the Ohio Constitution.

a. The 2006 version of the DMA is the only version of the DMA to be applied after June 30, 2006, the effective date of said statute.

b. Interpreting the 1989 version of the DMA as "self-executing" violates the Ohio Constitution.

4. A severed oil and gas mineral interest is the "subject of" any title transaction which specifically identifies the recorded document creating that interest by volume and page number.

5. Irrespective of the savings events in Ohio Rev. Code § 5301.53(B)(3), the limitations in Ohio Rev. Code§ 5301.49 can independently bar a claim under the DMA.

6. If a Court applies the 1989 version of the DMA in a lawsuit filed after June 30, 2006, the 20-year look-back period shall be calculated starting on the date a complaint is filed which first raises a claim under the 1989 version of the DMA.

7. A claim brought under the 1989 version of the DMA must have been filed within 21 years of March 22, 1989 (or, at the very latest, March 22, 1992), or such claim is barred by the statute of limitations in Ohio Rev. Code § 2305.04.

{5607334:} 11 Virgil Farnsworth, et al. v. James Burkhart, et al. Case Number 2014-1909

Propositions of law:

1. The 1989 version of the Ohio Rev. Code§ 5301.56, the Ohio Dormant Minerals Act ("Former DMA"), was prospective in nature, division (B} applies to any 20-year period that elapses while the Former DMA was in effect.

2. A Claim to Preserve filed and recorded under division H(l)(A) of the current version of Ohio Rev. Code § 5301.56 ("Current DMA") does not have the same effect as a claim filed and recorded under division B(3)(e) of the Current DMA.

{5607334:} 12 SUMMARIES OF THE DMA CASES BEFORE THE SUPREME COURT OF OHIO

Dodd v. Croskey Supreme Court of Ohio Slip Opinion No. 2015-Ohio-2362

This opinion was issued by the Supreme Court of Ohio on June 18, 2015. It is the first and only case regarding the Ohio DMA decided to date by the Supreme Court. This case was on appeal from the Seventh District Court of Appeals.

Plaintiffs/Appellants are the surface owners and Defendants/Appellees are the mineral holders. In 1947, Samuel and Blanche Porter conveyed the property at issue in Harrison County, Ohio to Consolidated Fuel Company and reserved all of the oil and gas mineral interest. As part of the same transaction, the Porters also conveyed their undivided one-third interest in separate tracts of land to Consolidated Fuel Company. The Warranty Deed conveying this one-third interest contains the same reservation regarding the mineral interest. This reservation was also contained in the deeds of all subsequent transfers of the surface rights, including the transfer to the surface owner Plaintiffs/Appellants Phillip Dodd and Julie Bologna in August 2009.

The surface owners gave notice by publication on November 27, 2010 of their intent to declare the mineral interest owned by Defendants/Appellees, the heirs of the Porters, abandoned. On December 23, 2010 Defendant/Appellee John William Croskey timely filed a document entitled “Affidavit Preserving Minerals” with the Harrison County Recorder in response to the Dodd notice. Notwithstanding this affidavit, the surface owners filed an Affidavit of Abandonment on December 27, 2010 with the Harrison County Recorder claiming that the mineral interest owned by Defendants/Appellees had been abandoned.

In a unanimous decision, the Supreme Court ruled that under the 2006 amendments to the statute, after an owner of surface land gives notice of his or her intent to declare the mineral interest abandoned, the holder of the mineral rights can preserve their rights by timely filing an affidavit with the county recorder. The affidavit must state the nature of the mineral interest, the recording information upon which the claim is based, and that the mineral holder intends to preserve the mineral interest. McDonald Hopkins represented a group of the mineral holders in this case.

Most significantly, the Supreme Court determined that at least under the 2006 amendments to the DMA, the mineral holder can preserve his or her mineral interest upon the timely filing of the affidavit even if there had been no prior Savings Events that would otherwise have been required to preserve the mineral interest. The Supreme Court ruled that the affidavit did not have to refer to a prior Savings Event, nor did the affidavit itself have to be filed in the 20 years preceding notice by the surface owner.

The Supreme Court specifically noted that it was not ruling on the issue of when to apply the 1989 original version of the DMA and when to apply the 2006 version. These issues will be determined in subsequent cases still pending before the Court.

{5607334:} 13 The 2006 amendments to the DMA established a procedural mechanism whereby the surface owner must give notice by certified mail or by publication “if service cannot be completed,” of the owner’s intent to declare the mineral interest abandoned. R.C. 5301.56(E)(1). The holder then has 60 days after the date of service or publication to file a preservation claim or an affidavit with the county recorder that he intends to preserve and not abandon the mineral interest. R.C. 5301.56(H)(1).

Under the original 1989 DMA, as well as the 2006 amendments, one of the enumerated Savings Events is the filing by the mineral holder of a preservation claim with the county recorder. R.C. 5301.56(B)(3)(e). In Dodd, the surface owner argued that the preservation claim was filed by the mineral holder after the notice of intent and not as a Savings Event within the 20 year period preceding the enactment of the 1989 DMA.

The Supreme Court strictly construed the plain language of the 2006 amendments, stating that the statute clearly provides that, in response to a notice of intent to declare the mineral interest abandoned, the holder can preserve the mineral interest by filing within sixty (60) days either a preservation claim or an affidavit which identifies one of the Savings Events which had occurred within the 20 years preceding the date of notice from the surface owner. R.C. §5301.56(H)(1)(a)(b).

This case is significant because, at least under the 2006 amendments, the holder can preserve the mineral rights by timely filing a claim of preservation after a notice of intent from a surface owner to declare the mineral interest abandoned, even if there had been no prior Savings Events.

The court had sua sponte accepted a cross appeal on the issue of whether the reservation of a mineral interest referenced in a subsequent deed to the surface owner constituted a “title transaction” and thus a Savings Event. R.C. 5301.56(B)(3)(a). The court declined to decide this issue, determining that it was moot given the holding in the case. As a result, this issue remains for a subsequent ruling as an assignment of error in two of the pending cases before the Supreme Court of Ohio.

{5607334:} 14 Chesapeake Exploration v. Buell Supreme Court of Ohio, Case no. 2014-0067

On March 26, 2014 the Supreme Court of Ohio agreed to answer two questions certified by the United States District Court for the Southern District of Ohio as stated below. Oral argument was held on August 14, 2014. The court has not yet issued an opinion.

Plaintiff/Petitioner North American Coal Royalty Company (“North American”) is the record owner of the oil and gas rights beneath the property and the lessees of the oil and gas rights are the other Plaintiffs/Petitioners. Defendants/Respondents Buell, et al. are the surface landowners.

In 1943, the property at issue in Harrison County, Ohio was owned by the North American Coal Corporation (“NA Coal”), which transferred the Property to the Powhatan Mining Company (“Powhatan”) on or about January 30, 1943. In October 1958, Powhatan transferred the surface rights to Clarence and Anna Belle Sedoris, but expressly excepted and reserved the oil and gas rights by deed. Powhatan Mining merged into NA Coal in January 1959, and took ownership of the severed mineral interest at that time. The same reservations and exceptions applied to all of the subsequent transfers of the surface estate, including the transfer of the surface rights in 10.37 acres of the property to Defendants/Respondents Jeffrey and Janice Elias in April 1995 and the transfer of the surface rights in 20.17 acres of the property to Defendants/Respondents Ariel and Sunni Ordronneau in July 2011.

In November 2008, Bellaire Corporation f/k/a NA Coal transferred the severed mineral estate, including the oil and gas rights, to Plaintiff/Petitioner North American Coal Royalty Company by a quit claim deed. North American Coal then leased the severed oil and gas rights to Mountaineer Natural Gas Company in January 2009. These severed oil and gas rights leases were subsequently transferred and assigned to Plaintiffs/Petitioners Chesapeake Exploration, L.L.C., CHK Utica, L.L.C., Larchmont Resources, L.L.C., Dale Pennsylvania Royalty, LP, TOTAL E&P USA, INC. and Dale Property Services Penn., LP, which previously held an interest in the oil and gas lease and assigned this interest to Plaintiff/Petitioner Dale Pennsylvania.

I. Is The Recorded Lease Of A Severed Subsurface Mineral Estate A Title Transaction Under The Ohio Dormant Mineral Act, R.C. 5301.56(B)(3)(a)?

North American, the mineral owner, entered into recorded oil/gas leases in 1974 and 1984 which were then assigned in 1975 and 1984. North American and the mineral lessees argue that a recorded oil/gas lease is a “title transaction” under the DMA and hence a Savings Event timely filed within the 20 year period prior to 1989 as follows:

1. The Marketable Title Act defines a “title transaction” as any transaction affecting title to any interest in land, with enumerated examples (R.C. §5301.47(F)). The examples are illustrative and not intended to exclude leases.

2. Every court but one that has addressed the issue has concluded that an oil and gas lease is a “title transaction” and therefore a Savings Event under the DMA.

{5607334:} 15 3. The analysis under the DMA should not be determined based on how Ohio law may have classified an oil and gas lease for other purposes. In Harris v. Ohio Oil Co., 57 Ohio St.118 (1897) the court held that an oil and gas lease creates a fee simple determinable interest, although that term was not explicitly stated. In Back v. The Ohio Fuel Gas Co., 160 Ohio St. 81 (1953), the court reasoned that an instrument similar to an oil/gas lease was akin to a license. Notwithstanding this apparent divergence, the mineral holders/lessees assert that it is not necessary to decide whether an oil/gas instrument conveys title to an interest in land or is a license because the definition of a “title transaction” is so broad; namely, whether the lease is “any transaction affecting title.” R.C. 5301.47(F).

4. To find that an oil/gas lease does not maintain a mineral owner’s interest under the DMA would be completely contrary to the activity the act seeks to encourage, the development of minerals in Ohio.

5. Ohio law characterizes an oil/gas lease as a fee simple determinable interest, thus clearly establishing that the mineral interest was the subject of a “title transaction.”

The surface owners argue that a recorded oil/gas lease is not a “title transaction” Savings Event for the following reasons:

1. The definition of “title transaction” in R.C. 5301.47(F) does not enumerate oil/gas leases.

2. A separate statutory Savings Event preserves a mineral interest from abandonment where there has been actual production or withdrawal of minerals under enumerated circumstances, including “from the lands covered by a lease to which the mineral interest is subject.” R.C. 5301.56 (B)(1)(c)(ii). They argue that an executed lease by itself should not be the Savings Event, but instead actual production from lands covered by a lease which did not occur in this case.

3. An oil/gas lease is a license and therefore does not affect title.

II. Is The Expiration Of A Recorded Lease And The Reversion Of The Rights Granted Under That Lease A Title Transaction That Restarts The 20 Year Forfeiture Clock Under The DMA At The Time Of The Reversion?

The oil and gas reverted to North American in January, 1989 upon the expiration of the primary lease term. If the reversion of the oil/gas rights to the lessor upon the termination of a lease is a “title transaction” under the DMA, then the reversion in 1989 restarted the 20 year clock, which ran until 2009, three years after the DMA was amended in 2006. The mineral owners and lessees argued that the release of rights under an oil/gas lease qualifies as a title transaction because it “affects title.” They argue that the expiration need not be recorded because it occurs pursuant to the terms of the original recorded lease.

{5607334:} 16 The surface owners argue that:

1. An expiration of an oil/gas lease should not be considered a “title transaction” because it would create an unworkable system of verifying title in the oil/gas industry and thus contrary to the intent of the DMA.

2. The abandonment period is not tolled during the primary term of an oil/gas lease and thus requires a subsequent Savings Event to preclude abandonment.

3. The statutory Savings Event requires not only that the mineral interest is the subject of a title transaction, but also that the title transaction has been filed or recorded, R.C. 5301.56(B)(1)(c)(i). In this case, the reversion/expiration of the lease was not recorded.

{5607334:} 17 Corban v. Chesapeake Exploration Supreme Court of Ohio, Case no. 2014-0804

Petitioner/Plaintiff is the surface owner. Defendant/Respondent North American Coal Royalty Company is the sole record owner of the oil, gas and mineral rights. The other Defendants/Respondents are the lessees of the oil and gas rights. In 1959, Defendant/Respondent North American Coal Royalty Company’s (“North American”) predecessor, North American Coal Corporation (“NA Coal”), conveyed the property at issue in Harrison County, Ohio to the predecessors of Petitioner/Plaintiff Hans Michael Corban and reserved the oil, gas and mineral rights for itself. NA Coal entered into an oil and gas lease recorded in February 1984 and assigned this lease to Carless Resources, Inc. in May 1985. beneath the property by virtue of an oil and gas lease from North American Coal Royalty Company and subsequent assignments. This lease expired and the rights reverted to Bellaire Corporation f/k/a NA Coal in 1989. In 2009, North American, Bellaire Corporation’s successor, entered into an oil and gas lease with Mountaineer Natural Gas Company. The remaining Defendants/Respondents Chesapeake Exploration, L.L.C., CHK Utica, L.L.C., Larchmont Resources, L.L.C. Dale Pennsylvania Royalty, LP and TOTAL E&P USA, Inc. are the current lessees of the 2009 lease.

The United States District Court for the Southern District of Ohio certified the following two questions to the Supreme Court of Ohio:

1. Does the 2006 version or the 1989 version of the DMA apply to claims asserted after 2006 alleging that the rights to oil, gas, and other minerals automatically vested in the surface land holder prior to the 2006 amendments as a result of abandonment?

2. Is the payment of a delay rental during the primary term of an oil and gas lease a title transaction and “Savings Event” under the DMA?

On July 23, 2014 the court accepted the certified questions. Oral argument was held on May 6, 2014. No decision has been issued.

The first question presents the same issues addressed in Walker v. Shondrick-Nau, Supreme Court case no. 2014-0803, discussed more fully in the summary of that case.

The second issue is directly related to certified state law questions in Chesapeake Exploration v. Buell, Supreme Court case no. 2014-0067, discussed more fully in the summary of that case.

{5607334:} 18 Walker v. Shondrick-Nau Supreme Court of Ohio, Case no. 2014-0803

Plaintiff/Appellee is the owner of the surface rights and Defendant/Appellant is the holder of the mineral rights. In 1964, John Noon purchased the property at issue in Noble County, Ohio. On July 26, 1965, Noon severed the mineral rights and created a separate mineral estate by reserving the mineral rights to himself when he sold the surface rights on that date. These mineral rights were reserved in the deeds conveying the surface rights in subsequent transactions, including to Plaintiff/Appellee Jon Walker, Jr. On December 2, 2011, Defendant/Appellant sent a Notice of Abandonment of Mineral Interest to Noon. On January 10, 2012, Noon filed an Affidavit and Claim to Preserve Mineral Interest. Noon passed away after the Complaint was filed and his daughter, Shondrick-Nau, in her capacity as the executrix of Noon’s estate and successor trustee of Noon’s trust, was substituted as the Appellant in this case.

By Opinion dated April 3, 2014, the Seventh District Court of Appeals ruled in favor of the surface owner on all issues, 2014-Ohio-1499, 2014 WL 1407942. The Court of Appeals held that:

1. A deed transferring the surface property which references a prior mineral reservation does not constitute a “title transaction,” one of the enumerated Savings Events. R.C. 5301.56(B)(1)(c)(i).

2. The 1989 version of the DMA is self-executing. The original severance of the mineral interest occurred in 1965 with no Savings Event thereafter. The mineral estate became abandoned and merged with the surface in 1992, the end of the three year grace period after the enactment of the 1989 DMA. Any preservation claim filed pursuant to the 2006 statute was ineffective because the mineral interest had already been abandoned.

This is the most significant and pivotal case regarding the DMA before the Supreme Court, determining whether the 1989 version of the DMA was self-executing during the time it was in effect prior to the enactment of the 2006 amendments to the statute, resulting in the abandonment of mineral rights as a matter of law in the absence of a Savings Event during the 20 year period preceding the enactment of the statute.

The Appellant mineral holder asserts six propositions of law grouped generally into three categories as follows:

I. The 2006 Version Of The DMA Is The Only Version Of The Statute To Be Applied After June 30, 2006, The Effective Date Of The Amendments.

II. To Establish A Mineral Interest As “Deemed Abandoned” Under The 1989 Version Of The DMA, The Surface Owner Must Have Taken Some Action To Establish Abandonment Prior To June 30, 2006.

1. The 1989 DMA is ambiguous with respect to whether it was intended to be “self- executing,” specifically as it relates to the interpretation of the 20 year period

{5607334:} 19 within which a Savings Event must occur and how the lapse would occur if there were no Savings Events. The 2006 DMA amendments removed the ambiguity by establishing a procedure for notice and recordation of abandonment or preservation of the mineral interest.

2. The interpretation of the statute as self-executing frustrates the purpose of the statute because it is not possible to ascertain from the record chain of title whether some of the Savings Events actually occurred. Therefore, the 1989 DMA should require a surface owner to commence a quiet title action or declaratory judgment to establish abandonment after the expiration of the 20 year period during which no Savings Event occurred.

3. Under the self-executing theory of abandonment, the 1989 version of the DMA results in a forfeiture of property and a loss of vested property rights in violation of the Ohio Constitution.

4. The 2006 amendments to the DMA eliminate the claimed ambiguity in the statute by establishing procedural safeguards to the mineral holder and by requiring record notice of either abandonment or preservation of the mineral interest.

III. The 20 Year Lookback Period Should Be Calculated Starting On The Date A Complaint Is Filed Which First Raises A Claim Under The 1989 Version Of The DMA.

The 1989 statute provided for the lapse to occur if no specified Savings Events occurred within “the preceding 20 years.” R.C. 5301.56(B)(1)(c). The question arises as to what this means – 20 years preceding what date? The best course is to interpret the statute to require the filing of a lawsuit to quiet title or a declaratory judgment with the 20 year lookback period under the 1989 statute commencing on the date the action was filed.

IV. For Purposes Of Establishing A Savings Event, A Severed Oil And Gas Mineral Interest Is The “Subject Of” Any Title Transaction Which Specifically Identifies The Recorded Document Creating That Interest, Regardless Of Whether The Severed Mineral Interest Is Actually Transferred Or Reserved.

The most frequently litigated Savings Event is found in R.C. 5301.56(B)(3)(a). A mineral holder will retain the rights if the mineral interest “has been the subject of” a recorded title transaction during the relevant lookback period. The term title transaction is defined in the Marketable Title Act to mean “any transaction affecting title to any interest in land . . .” R.C. 5301.47(F). When inserting that definition into the language in R.C. 5301.56(B)(3)(a), the Savings Event occurs when:

The mineral interest has been the subject of any transaction affecting title to any interest in land.

Interpreting the legislative history, applying principals of statutory construction, and referencing R.C. 5301.49, a transfer of the surface which specifically references a prior severed oil and gas mineral interest constitutes a Savings Event.

{5607334:} 20 The Appellee surface owner asserts the following arguments:

1. The 1989 DMA is clear and unequivocal that a mineral interest is automatically abandoned if a Savings Event has not occurred within the statutory 20 year period. There is no requirement for the surface owner to commence any action to establish abandonment.

2. A “rolling” 20 year period of time should apply. The first analysis is to determine whether there was a Savings Event within the 20 years preceding the effective date of the statute, March 22, 1989. If there was no Savings Event, the interest lapsed and was automatically abandoned. If there was some Savings Event within that period, then the mineral interest can be preserved only if there has been a subsequent Savings Event within 20 years thereafter. If no such subsequent Savings Event occurred, the mineral interest is abandoned. In other words, the mineral interest can be preserved only by successive Savings Events within every 20 year period.

3. A severed oil/gas mineral interest is not the subject of any title transaction involving only the surface estate, even if the transferring recorded document makes specific reference to a prior oil/gas reservation.

{5607334:} 21 Swartz v. Householder Supreme Court of Ohio, Case no. 2014-1208

Shannon v. Householder Supreme Court of Ohio, Case no. 2014-1209

Appellants are the mineral holders. Appellees are the surface owners. In 1946, Elva and Alma Lawrence, Chellissa and Walter Swickard, and Jetta and Arthur Householder transferred the property at issue in Jefferson County, Ohio to Cleve and Marie Landis with a deed that reserved all of the oil and gas mineral interest. Appellees Ernest and Shelda Shannon acquired the surface rights to part of the property in 1976. Appellees Daniel and Donna Swartz subsequently became surface owners of part of the property when they acquired title to the property by Survivorship Deed dated April 2002 and recorded in May 2002. The Householder Appellants are the heirs of Elva and Alma Lawrence, Chellissa and Walter Swickard, and Jetta and Arthur Householder.

In December 2010, the Shannon surface owners published notice of their intent to declare the mineral interest abandoned in a Jefferson County newspaper. In July 2011, the Swartz surface owners published notice of their intent to declare the mineral interest abandoned in the same newspaper. The mineral holders did not receive notice by certified mail of either notice. The mineral holders filed claims to preserve the mineral interest with the Jefferson County Recorder in July 2011 (in response to the Shannon notice) and August 2011 (in response to the Swartz notice).

In an Opinion issued for both cases on June 2, 2014, the Seventh District Court of Appeals held:

(1) Relying on Walker, the 1989 DMA is self executing and results in automatic abandonment of the mineral estate if no Savings Event has occurred in the 20 year period preceding the enactment of the statute (or the statutory grace period). In addition, the DMA is not unconstitutional.

2014-Ohio-2359, 12 N.E. 2d 1243.

On November 19, 2014, the Supreme Court accepted the appeal in both consolidated cases and held the case and stayed briefing for the decision in Walker v. Shondrick-Nau.

{5607334:} 22 Eisenbarth v. Reusser Supreme Court of Ohio, Case no. 2014-1767

This case is on appeal from the Seventh (7th) District Court of Appeals. The Appellant surface owner appealed two of the three propositions of law from the Opinion of the Seventh District Court of Appeals issued August 28, 2014, 2014-Ohio-3792, 18 N.E. 3d 477. The Supreme Court accepted jurisdiction on March 11, 2015. Oral argument has not been set.

Plaintiffs/Appellants are the surface owners and Defendants/Appellees are the mineral holders. In 1954, William Eisenbarth transferred two tracts of land in Monroe County to Paul and Ida Eisenbarth. The deed reserved one-half of all minerals underlying the lands and all rights to develop and remove those minerals. However, the right to lease the minerals was expressly given to Paul and Ida Eisenbarth. William Eisenbarth then transferred his half of the mineral estate to his other child Mildred Reusser by royalty deed. Paul and Ida then entered into numerous oil and gas leases, the last being recorded in January, 1974. In 1989, Paul and Ida Eisenbarth transferred the second tract of land to their son Keith in a deed stating that it was subject to all reservations of record. When Paul Eisenbarth died, his interest in the first tract of land was conveyed to Ida Eisenbarth by a Certificate of Transfer filed in 1990, which included the 1954 deed’s language on the mineral reservation and the right to lease. When Ida died, a Certificate of Transfer was filed in 1998, which transferred her interest in the first tract of land to her sons Plaintiffs/Appellants Keith, Leland and Michael Eisenbarth and also included the language from the 1954 deed.

Mildred Reusser died in 2002 and left her estate to Defendants/Appellees Dean Reusser, Marilyn Ice, Wilda Fetty, Martha Maag (who died and left her interest to her husband Robert Maag), Vernon Reusser, Paul Reusser, Davis Reusser and Dennis Reusser. In 2008, the surface owners signed an oil and gas lease. In 2009, the surface owners published a notice of abandonment of Mildred Reusser’s one-half interest in the minerals, and the mineral holders responded with a claim to preserve. In 2012, the Eisenbarths signed an oil and gas lease with another company and received a $766,250 signing bonus, half of which was being held in escrow.

The issues on appeal to the Supreme Court are as follows:

I. Whether A Recorded Oil And Gas Lease Is A “Title Transaction” Under The DMA.

In 1974, the surface owner entered into an oil/gas lease with respect to the entire mineral estate, even though the original severance reserved 50% to the surface owner. The surface owner retained the executive right to enter into a lease regarding the entire mineral estate. One of the Savings Events is that the mineral interest “has been the subject of a title transaction.” R.C. 5301.56(B)(1)(c)(i). The term “title transaction” is defined in the Marketable Title Act to mean “any transaction affecting title to any interest in land . . .” Read together, the Savings Event occurs when a “mineral interest has been the subject of any transaction affecting title to any interest in land.”

The Seventh District Court of Appeals reviewed the case law and the issue of whether an oil/gas lease is a license or a conveyance of the fee. But the court then determined that it did not

{5607334:} 23 have to reach that issue. The court held that a recorded oil/gas lease is an encumbrance on title and falls within the definition of “any transaction affecting title to any interest in land.” The Seventh District Court of Appeals held that the recorded oil/gas lease over the minerals sought to be abandoned constituted a Savings Event.

II. Whether The 20 Year Period Within Which A Savings Event Must Occur Must Be Prior To The Enactment Of The 1989 Statute Or Within 20 Years Immediately Preceding Any Date In Which The 1989 DMA Was In Effect.

This issue has been referred to as the “20 year rolling period.” The 1989 DMA states that the mineral interest shall be deemed abandoned and vested in the owner of the surface if any of the Savings Events had not occurred “within the preceding 20 years.” R.C. 5301.56(B)(1)(c). The statute presents an apparent ambiguity because it is not clear how the starting date on which the “preceding 20 years” is determined.

Surface owners argue that under the 1989 version of the DMA it should be 20 years preceding any date in which the 1989 DMA was in effect. Under this analysis, the mineral interest is deemed abandoned if the mineral holder did not take actions to effectuate a Savings Event every 20 years preceding any date between March 22, 1989 (the enactment of the DMA) and June 30, 2006 (the enactment of the DMA amendments). Under the facts in this case, the oil/gas lease at issue was recorded in January, 1974 but not recorded again after that date. The surface owner argued that, even if the 1974 oil/gas lease were a “title transaction,” the preservation of the mineral interest expired when it was not renewed by January, 1994, 20 years later. The mineral holder argued that the mineral interest is not abandoned if any Savings Event occurs 20 years prior to the enactment of the 1989 DMA, March 22, 1989, or within the three year grace period thereafter. R.C. §5301.56(B)(2).

The Seventh District Court of Appeals held that the 20 year lookback period is fixed and not rolling. Therefore, assuming the 1989 version of the DMA governs, a mineral holder will have preserved the mineral interest if any Savings Event has occurred at any time within the 20 years preceding March 22, 1989, even if no actions were taken at any time after that to renew or re-establish a Savings Event.

{5607334:} 24 Dahlgren v. Brown Farm Properties, LLC Supreme Court of Ohio, Case no. 2014-1655

Plaintiffs/Appellants are the mineral holders and Defendants/Appellees are the surface landowners and developer. On February 16, 1949, Carl and Leora Dahlgren conveyed the property at issue in Carroll County, Ohio to William Lewis Dunlap with a deed that severed the subsurface title for oil and gas from the surface title for that property, as Leora Dahlgren excepted and reserved the mineral rights. Leora Dahlgren did not convey these mineral rights to anyone before her death on March 13, 1977, and her will and probate court orders vested her mineral rights in her three children. Her daughter mistakenly filed the probate court Certificates of Transfer with the Carroll County Probate Court rather than the Carroll County Recorder’s Office. Thus, the reserved mineral rights were not the subject of any title transaction that anyone recorded in the Carroll County Recorder’s Office between March 22, 1969 (20 years before the effective date for the 1989 version of the Dormant Minerals Act) and September 17, 2009 (the date when one of the Plaintiffs/Appellants first leased an oil and gas lease to a developer who recorded the lease).

Each of the plaintiffs (Leora Dahlgren’s descendants and their spouses) leased his or her oil and gas interests for the relevant properties to a developer who recorded those leases in the Carroll County Recorder’s Office in 2009 or 2010. In March 2012, one of the surface landowners sent the mineral holders and the leaseholder developer a “Notice of Owner’s Intent to Declare the Abandonment of Mineral Interest” for part of the relevant properties. Within 60 days after the surface landowners sent this notice, five of the eight mineral holders filed claims for their relevant mineral interests in the Carroll County Recorder’s Office.

The Court of Common Pleas for Carroll County issued an Opinion on November 5, 2013 authored by Judge Richard Markus, sitting by assignment, which held that the 1989 DMA deemed the mineral owners rights abandoned if none of the Savings Events occurred within the 20 year period prior to the enactment of the statute or the statutory grace period. But the court further held that this created an “inchoate right” and that it did not transfer ownership without judicial confirmation or at least the opportunity for the mineral holder to contest their absence or the effect of their absence. The court further found that the 2006 amendments governed and that five of the eight plaintiff mineral holders timely filed preservation claims under the amended statute, thus preserving their interest from abandonment.

Relying on its prior decision in Walker v. Shondrick-Nau, 2014-Ohio-1499, 2014 WL 1407942 and Schwartz v. Householder, 2014-Ohio-2359, 12 NE 2nd 1243, the Seventh District Court of Appeals reversed in an Opinion issued September 14, 2014, 2014-Ohio-4001, 19 N.E. 3d 926. The Court of Appeals held that the 1989 DMA was indeed self-executing and that the mineral holder retained no “inchoate” rights after the mineral estate was abandoned and vested with the surface owner in the absence of Savings Events within the statutory 20 year period.

On March 11, 2015, the Supreme Court accepted the appeal and held the case for the decisions in Walker v. Shondrick-Nau and Corbin v. Chesapeake Exploration, LLC. Pursuant to that order, no briefing on the merits has been submitted.

{5607334:} 25 Taylor v. Crosby Supreme Court of Ohio, Case no. 2014-1886

Plaintiffs/Appellants are the mineral holders and Defendants/Appellees are the owners of the surface rights. On August 5, 1971, Benjamin Belt conveyed the property at issue in Belmont County, Ohio to Eli and Virginia Bell with a deed that reserved a one-half interest in the oil and gas underlying the property. On July 10, 1975, Belt entered into an oil and gas lease with United Petroleum Corporation for his one-half interest. In July 1979, the Bells conveyed their entire interest in the property to Defendants/Appellees Donald and Richard Crosby (wives are Defendants/Appellees Tammy and Janis Crosby) (collectively the “Crosby Defendants”) subject to Belt’s reservation of the one-half interest in the oil and gas. From 1979 to the present, the Crosby Defendants have been the owners of the surface rights. Belt died in January 1993 and his estate was not probated until May, 2011, at which time Belt’s one-half oil and gas interest in the parcel was transferred via probate to his grandchildren, the Plaintiffs/Appellants.

On October 29, 2007, the Crosby Defendants leased the mineral rights to Defendant/Appellee Reserve Energy Exploration (“Reserve”). Reserve assigned its interest in the lease to Petroleum Corporation on May 15, 2008. On November 6, 2008, Reserve with the consent of the Crosby Defendants, published a Notice of Abandonment in the local newspaper regarding Belt’s one-half interest in the oil and gas. The Plaintiffs/Appellants did not take any action and the Crosby Defendants recorded an Affidavit of Abandonment on December 19, 2008 stating that this one-half oil and gas interest had been abandoned.

On September 24, 2014, the Seventh District Court of Appeals issued an Opinion, reaffirming its position expressed in Eisenbarth v. Royser that the 20 year period is a fixed look back period preceding the enactment of the 1989 statute (or the statutory grace period) and not a “rolling” look back period, 2014-Ohio-4433, 2014 Ohio App. LEXIS 4349.

On April 8, 2015, the Supreme Court accepted the appeal and then held the case and stayed briefing for the decision in Walker v. Shondrick-Nau.

{5607334:} 26 Tribett v. Shepard Supreme Court of Ohio, Case no. 2014-1966

Plaintiffs/Appellants are the surface owners and Defendants/Appellants are the purported mineral owners. In 1962, Joseph, John and Keith Shepherd sold the surface rights and coal interests they had in the property at issue in Belmont County, Ohio to Seaway Coal and reserved all other mineral interests. This reservation was contained in the deeds of all subsequent transfers of the surface rights and coal interests. In 1996 and 2006, Plaintiffs/Appellants Vernon and Susan Tribett acquired the property at issue and became the surface owners. On September 29, 2011, the surface owners published a Notice of Abandonment of Mineral Interest in the local newspaper and did not attempt service. On October 28, 2011, Defendants/Appellants Barbara and Marion Shepherd, the purported mineral owners, filed an affidavit to preserve the mineral interests that they allegedly inherited from Joseph, John and Keith Shepherd.

In an Opinion issued September 29, 2014, the Seventh District Court of Appeals held:

(1) Relying on the prior opinion in Dodd v. Croskey (cross appeal accepted on this issue sua sponte by the Ohio Supreme Court and then not decided) and Walker v. Shondrick-Nau, the transfer of the surface lands with reference to a prior reservation of mineral rights does not constitute a “title transaction” with respect to the mineral interest under the DMA.

(2) Relying upon the prior opinions in Walker and Schwartz v. Householder, 2004- Ohio-2359, the 1989 DMA is self-executing and results in automatic abandonment of the mineral estate if no Savings Event has occurred in the 20 year preceding the enactment of the statute (or the statutory grace period). In addition, the DMA is not unconstitutional.

(3) Relying on its opinion in Eisenbarth v. Royser, 2014-Ohio-3792, the 20 year look back period is fixed and not rolling.

2014-Ohio-4320, 20 N.E. 3d 365.

On April 29, 2015, the Supreme Court accepted the appeal and then held the case and stayed briefing for the decision in Walker v. Shondrick-Nau.

{5607334:} 27 Farnsworth v. Burkhart Supreme Court of Ohio, Case no. 2014-1909

Plaintiffs/Appellees are the surface owners and Defendants/Appellants are the mineral owners. In 1980, Veronica Burkhart conveyed the property at issue in Monroe County, Ohio and reserved the mineral rights. These mineral rights were reserved in the deeds in subsequent transactions, including the 1988 deed that conveyed the property to Plaintiffs/Appellees Virgil and Theresa Farnsworth. When Veronica Burkhart died in 1995, her mineral rights were inherited by seven heirs, the Defendants/Appellants. However, Defendants/Appellants did not apply for a Certificate of Transfer until February 2012 and the Certificate of Transfer was recorded in the Monroe County Recorder’s Office on February 27, 2012. In the meantime, on February 22, 2012, the surface owners generated a Notice of Abandonment, sending notice to the mineral holders by certified mail, return receipt requested. On April 19, 2012, these mineral holders recorded a claim to preserve their mineral interests. On April 23, 2012, the surface owners recorded an affidavit of abandonment.

In an Opinion issued September 22, 2014, the Seventh District Court of Appeals held:

(1) Relying on Walker, 1989 DMA is self-executing and results in automatic abandonment of the mineral estate if no Savings Event has occurred in the 20 year period preceding the enactment of the statute (or the statutory grace period). In addition, the DMA is not unconstitutional.

(2) Relying on its decision in Eisenbarth v. Reusser, 2014-Ohio-3792, the 20 year look back period is fixed and not rolling. But the court then held that there was no abandonment under the 1989 DMA because the mineral rights were not severed until 1980.

(3) Relying upon the prior Opinion in Dodd v. Croskey (cross appeal on this issue accepted sua sponte by the Ohio Supreme Court and then not decided) and Walker, the transfer of the surface lands with reference to a prior reservation of mineral rights does not constitute a “title transaction” with respect to the mineral interest under the DMA.

(4) Relying upon the prior Opinion in Dodd v. Croskey, the preservation claim filed by the mineral holder pursuant to the 2006 amendments in response to a notice from the surface owner of its intent to declare the mineral interest abandoned was sufficient to preserve the mineral interests, even in the absence of a Savings Event having occurred in the preceding 20 years. This issue has now been decided by the Supreme Court in Dodd v. Croskey, affirming the holding of the Seventh District Court of Appeals on this issue.

2014-Ohio-4184, 21 N.E. 3d 577.

On April 29, 2015, the Supreme Court accepted the appeal, held the case, and stayed the briefing for the decisions in Walker v. Shondrick-Nau and Dodd v. Croskey.

{5607334:} 28 "11&/%*9

ϴͬϮϴͬϮϬϭϱ

KŚŝŽŽƌŵĂŶƚDŝŶĞƌĂůĐƚ ^ƵƉƌĞŵĞŽƵƌƚŽĨKŚŝŽ

Z͘:ĞĨĨƌĞLJWŽůůŽĐŬ ĞƚŚ/͘'ŝůůŝŶ DĐŽŶĂůĚ,ŽƉŬŝŶƐ>> ϲϬϬ^ƵƉĞƌŝŽƌǀĞŶƵĞ ůĞǀĞůĂŶĚ͕KŚŝŽϰϰϭϭϰ ũƉŽůůŽĐŬΛŵĐĚŽŶĂůĚŚŽƉŬŝŶƐ͘ĐŽŵ ďŐŝůůŝŶΛŵĐĚŽŶĂůĚŚŽƉŬŝŶƐ͘ĐŽŵ

ϲƚŚ >ĂǁŽĨ^ŚĂůĞWůĂLJƐŽŶĨĞƌĞŶĐĞ ^ĞƉƚĞŵďĞƌϭϬͲϭϭ͕ϮϬϭϱ WŝƚƚƐďƵƌŐŚ͕WĞŶŶƐLJůǀĂŶŝĂ

^hDDZzK&d,WZ/DZz/^^h^Z'Z/E'd,D &KZd,^hWZDKhZdK&K,/K

KŚŝŽZ͘͘ϱϯϬϭ͘ϱϲ͕ŝŶĐůƵĚĞĚĂƐƉĂƌƚŽĨKŚŝŽ͛ƐDĂƌŬĞƚĂďůĞdŝƚůĞĐƚ;Z͘͘ϱϯϬϭ͘ϰϳƚŚƌŽƵŐŚ ϱϯϬϭ͘ϱϲͿĂŶĚĐŽŵŵŽŶůLJƌĞĨĞƌƌĞĚƚŽĂƐƚŚĞŽƌŵĂŶƚDŝŶĞƌĂůĐƚ;͞D͟Ϳ͕ŐŽǀĞƌŶƐƚŚĞƉƌĞƐĞƌǀĂƚŝŽŶĂŶĚ ĂďĂŶĚŽŶŵĞŶƚŽĨŵŝŶĞƌĂůŝŶƚĞƌĞƐƚƐǁŚŝĐŚŚĂǀĞďĞĞŶƐĞǀĞƌĞĚĨƌŽŵƚŚĞƐƵƌĨĂĐĞůĂŶĚƐ͘

dŚĞDƉƌŽǀŝĚĞƐŐĞŶĞƌĂůůLJƚŚĂƚŵŝŶĞƌĂůŝŶƚĞƌĞƐƚƐŵĂLJďĞƉƌĞƐĞƌǀĞĚƵƉŽŶƚŚĞŽĐĐƵƌƌĞŶĐĞŽĨ ĐĞƌƚĂŝŶĞǀĞŶƚƐ;ƌĞĨĞƌƌĞĚƚŽĂƐ͞^ĂǀŝŶŐƐǀĞŶƚƐ͟ͿĞŶƵŵĞƌĂƚĞĚĂƚZϱϯϬϭ͘ϱϲ;Ϳ;ϯͿ͘^ĂǀŝŶŐƐǀĞŶƚƐŝŶĐůƵĚĞ͗

;ŝͿ ƚŚĞŵŝŶĞƌĂůŝŶƚĞƌĞƐƚŚĂƐďĞĞŶƚŚĞƐƵďũĞĐƚŽĨĂƚŝƚůĞƚƌĂŶƐĂĐƚŝŽŶ͖

;ŝŝͿ ĂĐƚƵĂůƉƌŽĚƵĐƚŝŽŶĨƌŽŵƚŚĞŵŝŶĞƌĂůŝŶƚĞƌĞƐƚƐŽƌůĂŶĚƐƉŽŽůĞĚŽƌƵŶŝƚŝnjĞĚǁŝƚŚƚŚŽƐĞŝŶƚĞƌĞƐƚƐ͖

;ŝŝŝͿ ƚŚĞƵƐĂŐĞŽĨƚŚĞŵŝŶĞƌĂůŝŶƚĞƌĞƐƚƐĨŽƌƵŶĚĞƌŐƌŽƵŶĚƐƚŽƌĂŐĞ͖

;ŝǀͿ ƚŚĞŝƐƐƵĂŶĐĞŽĨĂĚƌŝůůŝŶŐƉĞƌŵŝƚƚŽƚŚĞŚŽůĚĞƌŽĨƚŚĞŵŝŶĞƌĂůŝŶƚĞƌĞƐƚƐ͖

;ǀͿ ƚŚĞĐƌĞĂƚŝŽŶŽĨĂƐĞƉĂƌĂƚĞƚĂdžůŝƐƚŝŶŐĨŽƌƚŚĞŵŝŶĞƌĂůŝŶƚĞƌĞƐƚƐ͖ĂŶĚ

;ǀŝͿ ƚŚĞĨŝůŝŶŐŽĨĂĐůĂŝŵďLJƚŚĞŚŽůĚĞƌŽĨƚŚĞŵŝŶĞƌĂůŝŶƚĞƌĞƐƚƐƚŽƉƌĞƐĞƌǀĞƚŚŽƐĞŝŶƚĞƌĞƐƚƐ͘

ϭ ϴͬϮϴͬϮϬϭϱ

ϭϵϴϵ^ƚĂƚƵƚĞ

dŚĞDǁĂƐŽƌŝŐŝŶĂůůLJĞŶĂĐƚĞĚŝŶϭϵϴϵĂŶĚƚŚĞŶ ƐƵďƐƚĂŶƚŝĂůůLJĂŵĞŶĚĞĚŝŶϮϬϬϲ͘dŚĞŽƌŝŐŝŶĂůϭϵϴϵƐƚĂƚƵƚĞ ŝŶĐůƵĚĞĚŶŽĞdžƉůŝĐŝƚƉƌŽǀŝƐŝŽŶƌĞƋƵŝƌŝŶŐƚŚĂƚĂŵŝŶĞƌĂůŚŽůĚĞƌ ďĞŐŝǀĞŶŶŽƚŝĐĞŽĨĂĐůĂŝŵŽĨĂďĂŶĚŽŶŵĞŶƚďLJƚŚĞƐƵƌĨĂĐĞ ŽǁŶĞƌ͘

dŚĞϭϵϴϵDƉƌĞƐĞƌǀĞƐƚŚĞŝŶƚĞƌĞƐƚŽĨƚŚĞŵŝŶĞƌĂů ŚŽůĚĞƌŝĨƚŚĞĞŶƵŵĞƌĂƚĞĚ^ĂǀŝŶŐƐǀĞŶƚƐŚĂǀĞŽĐĐƵƌƌĞĚ ͞ǁŝƚŚŝŶƚŚĞƉƌĞĐĞĚŝŶŐƚǁĞŶƚLJ;ϮϬͿLJĞĂƌƐ͘͟Z͘͘ ϱϯϬϭ͘ϱϲ;Ϳ;ϭͿ;ĐͿ͘dŚĞϭϵϴϵƐƚĂƚƵƚĞƚŚĞŶƐƚĂƚĞƐƚŚĂƚŝĨŶŽŶĞŽĨ ƚŚĞĞŶƵŵĞƌĂƚĞĚ^ĂǀŝŶŐƐǀĞŶƚƐŚĂƐŽĐĐƵƌƌĞĚǁŝƚŚŝŶƚŚĂƚƚŝŵĞ͕ ƚŚĞŵŝŶĞƌĂůŝŶƚĞƌĞƐƚ͞ƐŚĂůůďĞĚĞĞŵĞĚĂďĂŶĚŽŶĞĚĂŶĚǀĞƐƚĞĚ ŝŶƚŚĞŽǁŶĞƌŽĨƚŚĞƐƵƌĨĂĐĞ͘͘͘͟Z͘͘ϱϯϬϭ͘ϱϲ;Ϳ;ϭͿ͘

ϮϬϬϲŵĞŶĚŵĞŶƚƐ

/Ŷ ϮϬϬϲ͕ ƚŚĞ D ǁĂƐ ĂŵĞŶĚĞĚ ƚŽ ĞƐƚĂďůŝƐŚ Ă ŵĞĐŚĂŶŝƐŵ ǁŚĞƌĞďLJ ƚŚĞ ƐƵƌĨĂĐĞ ŽǁŶĞƌ ŝƐ ƌĞƋƵŝƌĞĚ ƚŽ ŐŝǀĞ ŶŽƚŝĐĞ ƚŽ ƚŚĞ ŵŝŶĞƌĂů ŚŽůĚĞƌ ďLJ ĐĞƌƚŝĨŝĞĚ ŵĂŝů Žƌ͕ ƵŶĚĞƌ ĐĞƌƚĂŝŶ ĐŝƌĐƵŵƐƚĂŶĐĞƐ͕ ďLJ ƉƵďůŝĐĂƚŝŽŶ ŽĨ ƚŚĞ ŝŶƚĞŶƚ ƚŽ ĚĞĐůĂƌĞ ƚŚĞ ŵŝŶĞƌĂů ŝŶƚĞƌĞƐƚ ĂďĂŶĚŽŶĞĚ͘ Z͘͘ ϱϯϬϭ͘ϱϲ;Ϳ;ϭͿ͘ dŚĞ ŵŝŶĞƌĂů ŚŽůĚĞƌ ƚŚĞŶ ŚĂƐ ƚŚĞ ƌŝŐŚƚ ƚŽ ĨŝůĞ Ă ĐůĂŝŵ ƚŽ ƉƌĞƐĞƌǀĞ ƚŚĞ ŵŝŶĞƌĂů ŝŶƚĞƌĞƐƚ Žƌ ĂŶ ĂĨĨŝĚĂǀŝƚ ƚŚĂƚ ĂŶLJ ŽĨ ƚŚĞ ^ĂǀŝŶŐƐǀĞŶƚƐŚĂƐŽĐĐƵƌƌĞĚǁŝƚŚŝŶƚŚĞϮϬLJĞĂƌƐ ŝŵŵĞĚŝĂƚĞůLJ ƉƌĞĐĞĚŝŶŐ ƚŚĞ ĚĂƚĞ ŽŶ ǁŚŝĐŚ ŶŽƚŝĐĞ ǁĂƐ ƐĞƌǀĞĚ Žƌ ƉƵďůŝƐŚĞĚ͘ Z͘͘ ϱϯϬϭ͘ϱϲ;,Ϳ;ϭͿ͘

Ϯ ϴͬϮϴͬϮϬϭϱ

WĞŶĚŝŶŐĂƐĞƐ

tŝƚŚ ƚŚĞ ĂĚǀĞŶƚ ŽĨ ƚŚĞ hƚŝĐĂ ƐŚĂůĞ ƉůĂLJ ĂŶĚ ƚŚĞ ŝŶĐƌĞĂƐĞĚ ǀĂůƵĞ ŽĨ ŵŝŶĞƌĂů ŝŶƚĞƌĞƐƚƐ ŝŶ ĞĂƐƚĞƌŶ KŚŝŽ͕ ƚŚĞ D ŚĂƐ ƐƉĂǁŶĞĚ ƐƵďƐƚĂŶƚŝĂů ůŝƚŝŐĂƚŝŽŶ͘ dŽ ĚĂƚĞ͕ ƚŚĞ ^ƵƉƌĞŵĞ ŽƵƌƚ ŽĨ KŚŝŽ ŚĂƐ ĚĞĐŝĚĞĚ ŽŶůLJ ŽŶĞ ĐĂƐĞ ƌĞŐĂƌĚŝŶŐ ƚŚĞ ŝŶƚĞƌƉƌĞƚĂƚŝŽŶ ŽĨ ƚŚŝƐ ƐƚĂƚƵƚĞ͕ ŽĚĚ ǀ͘ ƌŽƐŬĞLJ͕ ϮϬϱϱͲ KŚŝŽͲϮϯϲϮ͘ EŝŶĞ ĐĂƐĞƐ ƌĞŐĂƌĚŝŶŐ ƚŚĞ D ĂƌĞ Ɛƚŝůů ƉĞŶĚŝŶŐ ŝŶ ƚŚĞ ^ƵƉƌĞŵĞ ŽƵƌƚ ŽĨ KŚŝŽ͕ ǁŝƚŚ ĨŝǀĞ ŽĨ ƚŚŽƐĞ ĐĂƐĞƐ ƐƚĂLJĞĚ ƉĞŶĚŝŶŐ ƚŚĞ ĚĞĐŝƐŝŽŶ ŝŶ ŽŶĞ Žƌ ŵŽƌĞ ŽĨ ƚŚĞ ŽƚŚĞƌ ŵĂũŽƌ ĐĂƐĞƐ͘

WƌŝŵĂƌLJ/ƐƐƵĞƐĞĨŽƌĞƚŚĞ ^ƵƉƌĞŵĞŽƵƌƚŽĨKŚŝŽ

ϭ͘ /ƐƚŚĞϭϵϴϵD^ĞůĨͲdžĞĐƵƚŝŶŐ͍ /ƐƚŚĞϭϵϴϵDƐĞůĨͲĞdžĞĐƵƚŝŶŐƐƵĐŚƚŚĂƚƚŚĞŵŝŶĞƌĂůŝŶƚĞƌĞƐƚƐĂƌĞ ĂƵƚŽŵĂƚŝĐĂůůLJĂďĂŶĚŽŶĞĚĂŶĚǀĞƐƚĞĚǁŝƚŚƚŚĞƐƵƌĨĂĐĞĞƐƚĂƚĞŝĨŶŽŶĞŽĨƚŚĞ ^ĂǀŝŶŐƐǀĞŶƚƐŽĐĐƵƌƌĞĚǁŝƚŚŝŶƚŚĞ͞ƉƌĞĐĞĚŝŶŐϮϬLJĞĂƌƐ͘͟ dŚŝƐŝƐƚŚĞŵŽƐƚƐŝŐŶŝĨŝĐĂŶƚŝƐƐƵĞƌĞŐĂƌĚŝŶŐƚŚĞDďĞĨŽƌĞƚŚĞ^ƵƉƌĞŵĞ ŽƵƌƚ͕ǁŝƚŚƚŚĞŝƐƐƵĞƚŽďĞĚĞĐŝĚĞĚŝŶtĂůŬĞƌǀ͘^ŚŽŶĚƌŝĐŬͲEĂƵ͕ĂƐĞEŽ͘ ϮϬϭϰͲϬϴϬϯĂŶĚŽƌďĂŶǀ͘ŚĞƐĂƉĞĂŬĞdžƉůŽƌĂƚŝŽŶ͕ĂƐĞEŽ͘ϮϬϭϰͲϬϴϬϰ͘

Ϯ͘ /ƐƚŚĞϮϬzĞĂƌWĞƌŝŽĚ&ŝdžĞĚŽƌ͞ZŽůůŝŶŐ͍͟ dŚĞϭϵϴϵDƉƌŽǀŝĚĞƐƚŚĂƚƚŚĞŵŝŶĞƌĂůƌŝŐŚƚƐĂƌĞĚĞĞŵĞĚĂďĂŶĚŽŶĞĚĂŶĚ ǀĞƐƚĞĚŝŶƚŚĞƐƵƌĨĂĐĞŽǁŶĞƌŝĨŶŽŶĞŽĨƚŚĞ^ĂǀŝŶŐƐǀĞŶƚƐŚĂǀĞŽĐĐƵƌƌĞĚ ͞ǁŝƚŚŝŶƚŚĞƉƌĞĐĞĚŝŶŐϮϬLJĞĂƌƐ͘͘͘͟Z͘͘ϱϯϬϭ͘ϱϲ;Ϳ;ϭͿ;ĐͿ͘dŚĞƐƚĂƚƵƚŽƌLJ ůĂŶŐƵĂŐĞƌĂŝƐĞƐƚŚĞƋƵĞƐƚŝŽŶʹ ϮϬLJĞĂƌƐƉƌĞĐĞĚŝŶŐǁŚĂƚ͍ dŚŝƐŝƐƐƵĞǁŝůůďĞĚĞĐŝĚĞĚŝŶŝƐĞŶďĂƌƚŚ ǀ͘ZĞƵƐƐĞƌ͕ĂƐĞEŽ͘ϮϬϭϰͲϭϳϲϳ͘

ϯ ϴͬϮϴͬϮϬϭϱ

ϯ͘ tŚĞƚŚĞƌĂ^ĞǀĞƌĞĚKŝůĂŶĚ'ĂƐDŝŶĞƌĂů/ŶƚĞƌĞƐƚŝƐƚŚĞ͞^ƵďũĞĐƚKĨ͟ĂŶLJdŝƚůĞ dƌĂŶƐĂĐƚŝŽŶtŚŝĐŚ/ĚĞŶƚŝĨŝĞƐƚŚĞZĞĐŽƌĚĞĚŽĐƵŵĞŶƚƌĞĂƚŝŶŐƚŚĂƚ/ŶƚĞƌĞƐƚ͕ ǀĞŶŝĨƚŚĞ^ĞǀĞƌĞĚDŝŶĞƌĂů/ŶƚĞƌĞƐƚŝƐŶŽƚĐƚƵĂůůLJdƌĂŶƐĨĞƌƌĞĚ͘

dŚĞŵŽƐƚĐŽŵŵŽŶŽĨƚŚĞƐĞ^ĂǀŝŶŐƐǀĞŶƚƐŽĐĐƵƌƐŝĨƚŚĞ͞ŵŝŶĞƌĂů ŝŶƚĞƌĞƐƚŚĂƐďĞĞŶƚŚĞƐƵďũĞĐƚŽĨĂƚŝƚůĞƚƌĂŶƐĂĐƚŝŽŶ͟ƌĞĐŽƌĚĞĚŽƌĨŝůĞĚǁŝƚŚƚŚĞ ĐŽƵŶƚLJƌĞĐŽƌĚĞƌŝŶƚŚĞĐŽƵŶƚLJǁŚĞƌĞƚŚĞƉƌŽƉĞƌƚLJŝƐůŽĐĂƚĞĚ͘

dŚĞƚĞƌŵƚŝƚůĞƚƌĂŶƐĂĐƚŝŽŶŝƐĚĞĨŝŶĞĚŝŶƚŚĞDĂƌŬĞƚĂďůĞdŝƚůĞĐƚƚŽŵĞĂŶ ͞ĂŶLJƚƌĂŶƐĂĐƚŝŽŶĂĨĨĞĐƚŝŶŐƚŝƚůĞƚŽĂŶLJŝŶƚĞƌĞƐƚŝŶůĂŶĚ͘͘͘͟Z͘͘ϱϯϬϭ͘ϰϳ;&Ϳ͘tŚĞŶ ŝŶƐĞƌƚŝŶŐƚŚĂƚĚĞĨŝŶŝƚŝŽŶŝŶƚŽƚŚĞůĂŶŐƵĂŐĞŝŶZ͘͘ϱϯϬϭ͘ϱϲ;Ϳ;ϯͿ;ĂͿ͕ƚŚĞ^ĂǀŝŶŐƐ ǀĞŶƚŽĐĐƵƌƐǁŚĞŶ͗

dŚĞŵŝŶĞƌĂůŝŶƚĞƌĞƐƚŚĂƐďĞĞŶƚŚĞƐƵďũĞĐƚŽĨĂŶLJƚƌĂŶƐĂĐƚŝŽŶĂĨĨĞĐƚŝŶŐƚŝƚůĞ ƚŽĂŶLJŝŶƚĞƌĞƐƚŝŶůĂŶĚ͘

dŚŝƐŝƐƐƵĞǁŝůůďĞĚĞĐŝĚĞĚŝŶďŽƚŚtĂůŬĞƌǀ͘^ŚŽŶĚƌŝĐŬͲEĂƵ ĂŶĚŝŶ ŝƐĞŶďĂƌƚŚ ǀ͘ZĞƵƐƐĞƌ͘

ϰ͘ tŚĞƚŚĞƌĂZĞĐŽƌĚĞĚKŝůĂŶĚ'ĂƐ>ĞĂƐĞŝƐĂdŝƚůĞdƌĂŶƐĂĐƚŝŽŶWƵƌƐƵĂŶƚƚŽ ZϱϯϬϭ͘ϱϲ;Ϳ;ϯͿ;ĂͿ͘

dŚĞĂƉƉůŝĐĂďůĞƐƚĂƚƵƚŽƌLJůĂŶŐƵĂŐĞŝƐƐƵŵŵĂƌŝnjĞĚŝŶƚŚĞŝƐƐƵĞƐƚĂƚĞĚĂďŽǀĞ͘

dŚŝƐŝƐƐƵĞǁŝůůďĞĚĞĐŝĚĞĚŝŶŚĞƐĂƉĞĂŬĞdžƉůŽƌĂƚŝŽŶ͕>>ǀ͘<ĞŶŶĞƚŚƵĞůů͕ ĂƐĞEŽ͘ϮϬϭϰͲϬϬϲϳ͘

ϰ ϴͬϮϴͬϮϬϭϱ

ŵŝĐƵƐƌŝĞĨƐ

DĂŶLJ ŽĨ ƚŚĞ Žŝů ĂŶĚ ŐĂƐ ƉƌŽĚƵĐĞƌƐ ĂŶĚ ƚŚĞ ^ƚĂƚĞ ŽĨ KŚŝŽ ŚĂǀĞ ĨŝůĞĚ ĂŵŝĐƵƐ ďƌŝĞĨƐ ŝŶ ƚŚĞ ƉĞŶĚŝŶŐ ĐĂƐĞƐ͕ ůŝŶŝŶŐ ƵƉ ŽŶ ďŽƚŚ ƐŝĚĞƐ ŽĨ ƚŚĞ ŝƐƐƵĞƐ͘ dŚĞĨŽůůŽǁŝŶŐƉĂƌƚŝĞƐŚĂǀĞĨŝůĞĚĂŵŝĐƵƐďƌŝĞĨƐŝŶƐƵƉƉŽƌƚŽĨƚŚĞ ƐƵƌĨĂĐĞŽǁŶĞƌƐ͗

• ^ƚĂƚĞŽĨKŚŝŽ • 'ƵůĨƉŽƌƚŶĞƌŐLJŽƌƉŽƌĂƚŝŽŶ • WĂůŽŵĂZĞƐŽƵƌĐĞƐ͕>> • WƌŽƚĞŐĞ ŶĞƌŐLJ///͕>> • :ĞĨĨĐŽ ZĞƐŽƵƌĐĞƐ͕/ŶĐ͘ • DƵƌƌĂLJŶĞƌŐLJŽƌƉŽƌĂƚŝŽŶ dŚĞĨŽůůŽǁŝŶŐƉĂƌƚŝĞƐŚĂǀĞĨŝůĞĚĂŵŝĐƵƐďƌŝĞĨƐŝŶƐƵƉƉŽƌƚŽĨƚŚĞ ŵŝŶĞƌĂůŚŽůĚĞƌƐ͗ • ĞĚǁĂLJ >ĂŶĚΘDŝŶĞƌĂůƐŽŵƉĂŶLJ • KŚŝŽKŝůĂŶĚ'ĂƐƐƐŽĐŝĂƚŝŽŶ • ŚĞƐĂƉĞĂŬĞdžƉůŽƌĂƚŝŽŶ͕>͘>͘͘ • ĐůŝƉƐĞZĞƐŽƵƌĐĞƐŽƌƉŽƌĂƚŝŽŶ

ϱ

Paul Stockman is a partner in the Pittsburgh office of McGuireWoods LLP, where he has a broad-based complex trial and appellate litigation practice.

A substantial focus of Mr. Stockman's practice is the litigation, trial and appeal of energy disputes in the Appalachian Basin. Mr. Stockman has represented owners of oil and gas estates, oil and gas producers, operators of midstream facilities, and energy marketing companies in a variety of real property, contractual and environmental disputes.

Mr. Stockman has written extensively on court decisions impacting participants in the Appalachian Basin energy industry. Mr. Stockman also has an active practice representing policyholders in disputes with their insurers, and in litigating environmental, tort and commercial disputes. Mr. Stockman is a 1988 graduate of Harvard College and a 1992 graduate of the University of Virginia School of Law, where he served as an editor of the Virginia Law Review.

Before starting private practice, Paul served as law clerk to the Hon. Judge Ellsworth A. Van Graafeiland of the U.S. Court of Appeals for the Second Circuit. Recent Developments and Current Issues in Pennsylvania Oil and Gas Litigation – 2014-15

Paul K. Stockman McGuireWoods LLP1

CONTENTS:

I. Highlights...... 2

II. Lease-Related Litigation...... 5

A. Equitable Tolling – Harrison v. Cabot Oil & Gas Corp...... 5

B. Estoppel by Deed/“After-Acquired Title” – Shedden v. Anadarko E. & P. Co. .... 7

C. “Dual Purpose” Storage and Production Leases – Warren v. Equitable Gas Co. and Mason v. Range Resources – Appalachia, LLC...... 9

D. Deduction of Post-Production Expenses – Pollock v. Energy Corporation of America...... 11

E. Change of Ownership Clauses – Danko Holdings LP v. EXCO Resources (PA) LLC ...... 13

F. Pooling Issues and Missing or Non-Consenting Oil and Gas Owners – Hilcorp Energy Co. v. DEP, In re Hill, and EQT Production Co. v. Opatkiewicz ...... 14

III. Title-Related Litigation...... 16

A. “Tax Washing” – Herder Spring Hunting Club v. Keller...... 16

B. Title Searching and Trespass Claims – Sabella v. Appalachian Development Corp...... 19

C. Ownership of Coalbed Methane – Kennedy v. Consol Energy, Inc...... 20

IV. Robinson Township v. Commonwealth – Next Steps and Emerging Issues ...... 21

A. To Recap… ...... 21

B. On Remand… ...... 22

1 Any opinions in this discussion are purely those of the author, and not of McGuireWoods LLP or its clients. The author customarily represents litigants favoring oil and gas resource development in litigation and regulatory disputes against surface owners, regulatory agencies and citizen groups.

1 C. The Commonwealth Court Revisits and Narrows Robinson Township – Pennsylvania Environmental Defense Fund v. Commonwealth and Other Decisions...... 23

D. Efforts to Apply and Extend Robinson Township...... 25

E. What’s Next? ...... 25

V. Emerging Challenges to Midstream Development...... 27

A. Air Permitting and Source Aggregation ...... 28

B. Challenges to Pipeline Companies’ Condemnation and Other Authority as “Public Utilities”...... 30

C. Case Study – the PennEast Pipeline...... 31

VI. Other Environmental Litigation Trends...... 32

A. Environmental Enforcement Trends...... 32

B. Contamination Claims ...... 33

C. Trade Secret Protection for Fracturing Fluid Composition ...... 35

I. Highlights

In 2014 and 2015, Pennsylvania courts have continued to resolve outstanding issues presented by the rapid 21st-century development of the Marcellus and Utica formations. This swirl of controversies can, broadly speaking, be grouped into three categories – lease disputes, title disputes, and environmental disputes:

x First, there continues to be a steady drumbeat of litigation over oil and gas leases, as landowners sought to undo leases (some long-standing, some more recent) that they believed to be less favorable than those that might have been available under the market conditions available when litigation commenced. These decisions take as points of departure the often-aged precedents developed during Pennsylvania’s early heyday as a leading oil and gas producer in the 19th and early 20th century, as well as general principles of Pennsylvania contract and conveyancing law.

Of note, the Pennsylvania Supreme Court continues to feel little need to align its decisions with the rules prevalent in other oil- and gas-producing states. Perhaps the most significant lease-interpretation decision of the past year confirms Pennsylvania’s willingness to “go it alone,” refusing to equitably toll a lease’s primary term while a challenge to the lease is pending. See Harrison v. Cabot Oil & Gas,110 A.3d 178 (Pa. 2015). In so holding, the Pennsylvania Supreme Court

2 departed from the rule that has been well-established in other oil- and gas- producing jurisdictions.

In general, Pennsylvania courts continue to be strongly inclined to give lease terms their plain meaning, rejecting lessors’ post hoc challenges. For example, two Pennsylvania courts have held that “dual purpose” leases (providing both for production and storage) mean what they say, and that use of leased premises for either storage or production will keep the lease in effect, in its secondary term, for both purposes. See Mason v. Range Resources – Appalachia, LLC, No. 12-cv- 369 (W.D. Pa. July 27, 2015); Warren v. Equitable Gas Co., No. 697 WDA 2014 (Pa. Super Ct. Feb. 4, 2015). These courts have rejected landowners’ invitations to treat such leases as severable instruments, such that storage and production can be divorced from one another. Similarly, a federal court has enforced literally a lease provision requiring that the lessee be notified of changes in ownership, holding that a lease extension payment to a former landowner (in the absence of such notification by the new owner) was effective to continue the lease in force. See Danko Holdings LP v. EXCO Resources (PA) LLC, 57 F. Supp. 3d 389 (M.D. Pa. 2014), appeal pending.

In the coming year, the Pennsylvania Supreme Court’s willingness to adhere to existing doctrine will be tested by a decision involving “estoppel by deed” – i.e., whether a lease purporting to cover more property than the lessor actually owns at the time of lease will be construed to encompass the entire described tract if the landowner subsequently acquires the remaining property. The Superior Court, applying well-settled Pennsylvania precedent, held that a landowner who purports to convey property that he or she does not own cannot avoid the binding effect of the lease over the entirety of the described property once the lessor comes to own the entire tract. See Shedden v. Anadarko E. & P., L.P., 88 A.3d 228 (Pa. Super. Ct. 2014). The Pennsylvania Supreme Court has accepted an appeal, however, and the matter should be resolved in the coming year.

Further, there continue to be disputes over the deduction of post-production expenses prior to calculating royalty payments. While the Supreme Court’s foundational decision in Kilmer v. Elexco Land Services, Inc., 990 A.2d 1147 (Pa. 2010), held that royalties calculated on the price “at the wellhead” permitted the deduction of post-production costs, there have remained unanswered questions that Pennsylvania courts have ventured and are venturing to address. Further, in light of recent controversies, the General Assembly continues to debate legislative measures to address the issue.

The effect of the current low-price environment on these litigation trends remains to be seen. Lessor efforts to avoid existing leases may subside, as current conditions in the leasing market become less advantageous. At the same time, royalty litigation and other disputes over payments to lessors may increase, as lessor payments decrease.

3 x Second, ongoing litigation continues to resolve competing claims to oil and gas rights – rights which for decades were believed to have little value, but which now are actually worth fighting over. One of the most hotly-contested issues involves the validity of historical tax sales of “unseated” (i.e., undeveloped) land. Historically, property taxes on such land were deemed to be assessed against the land itself, in rem, and (the argument goes) landowners could “wash” their title – gaining title to previously-severed oil and gas interests – by defaulting on their taxes and buying the property back at the ensuing tax sale. As odd a result as this may seem, the Pennsylvania Superior Court upheld the practice in Herder Spring Hunting Club v. Keller, 93 A.3d 465 (Pa. Super. Ct. 2014), effectively holding its nose at a practice that it admitted was unfair in the interest of finality. The Supreme Court has accepted review, and will consider both the statutory construction and weighty Constitutional questions that this ruling presents. In the coming year, then, we can expect the Court to decide whether a party can improve its property rights, and retake property rights that it (or its predecessors-in-title) previously conveyed away, by intentionally defaulting upon the legal obligation to pay taxes. x Third, shale gas development continues to present a variety of environmental disputes. Most notably, litigation continues in the seminal Robinson Township matter, following the Supreme Court’s decision, 83 A.3d 901 (Pa. 2013), which (among other things) overturned state-wide land use provisions and which may have breathed new life into the Pennsylvania Constitution’s Environmental Rights Amendment.

Of particular note, the Commonwealth Court’s decision in Pennsylvania Environmental Defense Fund v. Commonwealth, 108 A.3d 140 (2015), has declined the invitation extended by the Supreme Court’s plurality opinion (concluding that it is not binding), and has thus construed Robinson Township narrowly. For the moment, this decision has forestalled some of the adverse consequences about which commentators (including the author) had previously warned. Even so, the matter at some point will likely need to be resolved by the (now differently constituted) Supreme Court. In the interim, the parameters of the Robinson Township decision continue to be explored, as citizen groups opposed to shale gas development use the plurality’s broad pronouncements as part of an effort to hinder drilling and production.

A notable feature of activists’ recent efforts is a shift in focus from seeking primarily to block “upstream” development (drilling and production) to attempting to obstruct “midstream” gathering and transmission projects. In the past year, citizens groups have fought pipeline development on a number of regulatory fronts, and this can be expected to continue in the coming years, as challenges to drilling and production by and large have not met with widespread success. The effect of the recent formation of a Pipeline Task Force by Governor Wolf remains to be seen, although its composition (heavily favoring activist groups and governmental officials) may not bode well for the pipeline industry.

4 There continue to be a variety of other challenges to various aspects of oil and gas production, including among other things continued efforts (i) to require Title V “major source” air permits for oil and gas operations by requiring the aggregation of emissions from multiple sources; (ii) to erode trade secret protections for proprietary fracturing fluid formulas; (iii) to limit or preclude seismic testing; and (iv) to prevent the beneficial reuse of abandoned mine drainage or drill cuttings. While decisions on these issues in the past year generally have favored the industry, many of those decisions are situation-specific or qualified, and so carry the germ of a future dispute.

Pennsylvania regulators also continue to be vigilant in policing and punishing environmental violations, assessing substantial fines and even pursuing criminal charges.

Finally, landowners who bring lawsuits or regulatory proceedings alleging property damage or contamination from drilling operations continue to face significant challenges. In Kiskadden v. DEP, 2015 WL 3798582 (Pa. Envt’l Hearing Bd. June 12, 2015), the Environmental Hearing Board upheld a Department of Environmental Protection determination that drilling operations did not contaminate a private well, and in Ely v. Cabot Oil & Gas, 2015 WL 140033 (M.D. Pa. Jan. 12, 2015), a federal court severely limited (but did not entirely preclude) a lawsuit asserting similar allegations. At the same time, a recent federal court decision, Russell v. Chesapeake Appalachia LLC, 305 F.R.D. 78 (M.D. Pa. 2015), points out that producers may not be able to expect quick and easy victories.

II. Lease-Related Litigation

Each year since the onset of Marcellus Shale development, Pennsylvania courts have resolved significant open questions concerning the interpretation and application of oil and gas leases. The most significant decisions of 2014-15 include the following:

A. Equitable Tolling – Harrison v. Cabot Oil & Gas Corp.

Because current oil and gas leases have relatively short primary terms, a lease dispute can present the producer with a “Hobson’s choice”: it can incur substantial lease development expenses, to prevent the lease from expiring at the close of the primary term, with the risk that those expenses could be unrecoverable if the landowner ultimately prevails, or it can do nothing, and hope that the lease dispute is resolved in the producer’s favor before the primary term expires, so that it may then undertake the often-costly activities needed to hold the lease into its secondary term and forestall lease expiration. Given the slow pace of litigation – particularly in Pennsylvania state courts, where summary judgment is disfavored and early decisions on the merits are often hard to come by – this is

5 a very real problem. In most oil and gas producing states, the doctrine of “equitable tolling” minimizes this risk, holding that the running of a lease’s primary term stops during the pendency of a landowner-initiated lease challenge.

Pennsylvania is not one of those states. On February 17, 2015, the Pennsylvania Supreme Court issued its ruling in Harrison v. Cabot Oil & Gas Corp., answering a question certified to it by the United States Court of Appeals for the Third Circuit, and holding that the primary term of an oil and gas lease would not be equitably tolled during the pendency of a landowner’s lawsuit challenging the lease’s validity. 110 A.3d 178 (Pa. 2015).

In Harrison, originally filed in the United States District Court for the Middle District of Pennsylvania, the landowners sought a declaration that their lease was invalid because of Cabot’s alleged fraudulent inducement as to the amount of per- acre lease bonus payments. Cabot counterclaimed, asking the District Court to declare that, should the Harrisons’ suit fail, the lease’s primary term would be equitably extended a period of time equivalent to the pendency of the litigation.

The district court agreed with Cabot on the merits, entering summary judgment against the landowner as to its fraudulent concealment claim, but predicted that Pennsylvania law would not allow equitable tolling of the primary term. Cabot appealed and requested certification to the Pennsylvania Supreme Court, which the Third Circuit granted and the Pennsylvania Supreme Court accepted.

The Supreme Court sided with the Harrisons (and with the district court), holding that the commencement of a declaratory judgment action does not constitute a repudiation of the lease, and declining to toll the lease’s primary term during the pendency of such a dispute. The Court agreed with the Harrisons that the risk factors associated with oil and gas development did not justify a diminution of existing legal principles or a curtailment of landowner rights. Id. at 185-86.

Notably, the Court added that its decision was bolstered by the fact that producers are free to negotiate express tolling provisions in their leases, pointing to the number of landowner challenges as clear evidence of the need for such language. Id. at 186.

The Court clarified, however, that while the mere challenge to a lease’s validity via a declaratory judgment action did not amount to a repudiation under Pennsylvania law, it was not entirely foreclosing the availability of equitable relief where a landowner takes affirmative acts to repudiate a lease (pointing, by way of example, to cases cited by Cabot in which landowners refused to surrender possession of leasehold premises). Id. at 186 & n.6.

In reaching this decision, the Supreme Court honored its usual practice of looking primarily to analogies from existing Pennsylvania law, even if its conclusions go against the principles of oil and gas law that prevail in other states. As a result,

6 because of Harrison, Pennsylvania law diverges from the overwhelming majority of other oil- and gas-producing jurisdictions on this issue.

Harrison does leave a number of open questions to be resolved in future challenges:

x Because the Supreme Court limited its holding and focused on the particular nature of and purpose for declaratory judgment actions, a different result may apply if the landowner brings a different cause of action (for example, a rescission claim).

x The decision does not reveal whether Cabot made a demand for adequate assurances after the lawsuit was filed. It is therefore unclear whether a consideration of the related doctrines of adequate assurance and anticipatory breach would have changed the result here. (These doctrines generally give a contracting party with reasonable grounds for insecurity the right to demand adequate assurance of future performance. The failure of the other party to provide the demanded assurance is then deemed to establish an anticipatory breach and a right for the insecure party to suspend performance.)

Nevertheless, certain things are clear in the wake of Harrison:

x Because the Court’s analysis focused on the fact that the lessee was free (but failed) to bargain for an express tolling provision, producers now know that Pennsylvania leases must include an express tolling provision, and/or a covenant that the lessor will not cause or create any encumbrance or cloud on title.

x Lessees should take steps to attempt to expedite litigation. Arguably, the potential lapse of the primary term, coupled with the risks associated with production activities on a contested property, should justify expedited treatment.

x Lessees should also consider early dispositive motions (e.g., motions to dismiss or preliminary objections, if appropriate, and early motions for summary judgment).

x Producers may wish to consider, in appropriate cases, taking steps to begin operations for exploring or producing oil and gas during the litigation (to the extent required to bring the lease into its secondary term), notwithstanding the risks.

B. Estoppel by Deed/“After-Acquired Title” – Shedden v. Anadarko E. & P. Co.

It is not uncommon for landowners, through mistake or otherwise, to execute oil and gas leases covering property that they do not actually own. If that is the case,

7 and if the landowner subsequently acquires the property, what effect does that have upon the lessee’s rights? In the context of ordinary conveyances, the venerable principle of “estoppel by deed” prevents the landowner from using that initial defect to his or her benefit, but Pennsylvania until recently had not addressed whether that applies in the context of oil and gas leases.

The Pennsylvania Supreme Court – having accepted an appeal in Shedden v. Anadarko E. & P. Co. L.P. – will resolve that question. In Shedden, the Sheddens entered into a 2006 oil and gas lease with Anadarko, purportedly for a 62-acre tract. Afterward, it was discovered that an 1894 deed reserved half of the subsurface rights, leading Anadarko to reduce the bonus payment to the Sheddens accordingly. In 2008, the Sheddens successfully quieted title on the reserved interested, and thereby obtained subsurface rights to the entire 62 acre tract. In 2011, Anadarko sought to invoke an extension option in the lease, but the Sheddens in response sought a judicial declaration that they could lease the second half of their subsurface rights to another party.

The Tioga County Court of Common Pleas entered summary judgment in favor of Anadarko, and the Superior Court affirmed, applying that the equitable doctrine of estoppel by deed:

The equitable doctrine of estoppel by deed is well-settled in this Commonwealth. Over a century ago, our Pennsylvania Supreme Court stated that, under this doctrine, “where a party conveys land to which he had no title, or a defective title, and afterwards acquired a good title, that title immediately inures to the benefit of the grantee.” Additionally, the Supreme Court stated that where, as here, “one conveys land with a covenant of warranty against all lawful claims and demands, he cannot be allowed to set up against his grantee, or those claiming under him, any title subsequently acquired by him by purchase or otherwise.” Rather, the subsequently acquired title “will inure, by way of estoppel, to the use and benefit of his grantee, his and assigns.”

Shedden v. Anadarko E. & P. Co., L.P., 88 A.3d 228, 232 (Pa. Super. Ct. 2014) (citations omitted; quoting Dixon v. Fuller, 46 A. 553 (Pa. 1900)). Accordingly, the Superior Court affirmed that “the Sheddens are barred from denying that the Lease covers all 62 acres of the leased premises by pointing out that, at the time of execution of the Lease, they did not have the power to lease the rights to the reserved 31 acres,” and that their “after-acquired title to the reserved 31 acres inured, by the way of estoppel, to the use and benefit of Anadarko.” Id. at 233.

Further supporting the Superior Court’s ruling were decisions from other oil- and gas-producing jurisdictions (in the conceded absence of Pennsylvania case law on the issue in the specific context of oil and gas leases), as well as a warranty of title in the lease and a provision in the lease defining the leased premises as “62.00 acres whether actually containing more or less,” as well as “any and all strings or

8 parcels of land adjoining or contiguous to the above described land and owned or claimed by LESSOR.͇

The Supreme Court allowed the Sheddens’ ensuing appeal, on the question whether the trial court erred in holding that “the [l]essors are estopped from denying that an oil[-]and[-]gas lease covered after-acquired oil[-]and[-]gas rights even though the [l]essee only paid the [l]essors in proportion to the [l]essors' actual interest.”

The Supreme Court’s decision to accept the appeal has surprised many observers, in that the Superior Court’s ruling appears to be a straightforward application of settled law. Briefing on the appeal is complete, and the matter is scheduled to be argued at the Court’s November 2015 argument session in Harrisburg.

C. “Dual Purpose” Storage and Production Leases – Warren v. Equitable Gas Co. and Mason v. Range Resources – Appalachia, LLC

After production from Pennsylvania’s oil and gas fields first depleted in the early to mid-20th Century, those strata often came to be used for the underground storage of natural gas transported to Pennsylvania by pipeline. This ensured efficient use of interstate pipelines and guaranteed sufficient supplies of natural gas for heating during periods of peak demand. Many of the instruments used for the creation of these storage fields are so-called “dual purpose” leases, which allow a lessee to conduct both oil and gas production and natural gas storage, with the election of either activity holding the lease in effect for all purposes.

Because of the prevalence of natural gas storage in Pennsylvania, large tracts of promising shale gas reserves are encumbered by such dual purpose leases. As a result of the explosion in gas production in the area, landowners have been challenging these leases, trying to reclaim production rights associated with properties otherwise within or near gas storage fields.

While Pennsylvania federal courts have previously had occasion to analyze these dual purpose leases, they reached divergent results, and left certain unanswered questions, leading to confusion and uncertainty. See Penneco Pipeline Corp. v. Dominion Transmission, Inc., No. 05–49, 2007 WL 1847391 (W.D. Pa. June 25, 2007), aff’d, 300 Fed. App’x 186 (3d Cir. 2008); Jacobs v. CNG Transmission Corp., 332 F. Supp. 2d 759 (W.D. Pa. 2004).

In the past year, however, two decisions – one from the Pennsylvania Superior Court and one from the United States District Court for the Western District of Pennsylvania – have brought increasing certainty to the subject. Both courts have given the language of dual purpose leases its plain meaning, have refused to construe the two rights under the lease as severable, and thus have held that a lessee’s use of leased premises for storage keeps a dual-purpose lease fully in effect for all purposes, including production.

9 The Superior Court’s decision in Warren v. Equitable Gas Co., LLC, No. 697 WDA 2014 (Pa. Super Ct. Feb. 4, 2015), is the first occasion on which a Pennsylvania state appellate court has considered the effect of a dual purpose lease. In Warren, the plaintiff-landowners alleged that the lease expired because the lessee took no steps to produce native gas from the property since the lease’s execution in 1966. The habendum clause stated that the lease would extend beyond its 10-year primary term “so long as said land is operated for the exploration or production of gas or oil … or as long as said land is used for the storage of gas or the protection of gas storage on lands in the general vicinity of said land.” There was no dispute that the property had been used for the storage of natural gas, and the trial court held that this was dispositive, based upon the plain language of the lease; in so ruling, the trial court held the production and storage rights conferred by the dual purpose lease were not severable from each other. The plaintiff-landowners appealed this decision to the Superior Court of Pennsylvania, which affirmed the trial court decision.

On appeal, the landowners generally asserted that gas production was the primary purpose of the lease, and that gas storage was only a secondary purpose, and that the lease should be construed to further production. The Superior Court disagreed.

The Superior Court also rejected the landowners’ severance argument, which attempted to divide the lease into two contracts (one for storage, one for production). The Court held that the trial court properly examined the lease’s language, the circumstances surrounding the lease’s execution, and the discernible intent of the original contracting parties, as Pennsylvania law dictates. See generally Jacobs v. CNG Transmission Corp., 772 A.2d 445, 452 (Pa. 2001).

The Superior Court also rejected the contention that the lessee had breached any implied covenant of production by electing to store gas on the property. Applying the Supreme Court’s decision in Jacobs, the Superior Court explained that no implied covenant to develop exists where the parties have expressly agreed that the landowner shall be compensated even where the lessee does not actively extract the resource. See Jacobs, 772 A.2d at 455. The Superior Court held that, because the lease expressly provides for separate rates to be paid for production and for storage, the lease did not obligate the lessee to produce gas and thus, under the plain language of the lease, the lessee’s ongoing storage activities extended the lease term to the present day. Accordingly, because the production and storage rights were not severable, and the land had been used for storage or the protection of storage since its primary term, the lease was held to remain in full force as to both production and storage rights.

Unfortunately, the opinion was designated as non-precedential, and cannot be cited in Pennsylvania state court proceedings. Even so, it may influence federal courts. Further, because there is no reason to believe that a Pennsylvania appellate court would decide otherwise, it may help to bring additional certainty to companies claiming rights through historical dual purpose leases.

10 More recently, Mason v. Range Resources – Appalachia LLC, No. 12-cv-369 (W.D. Pa. July 27, 2015), also answers questions left open following the Penneco decision. In Mason, the plaintiffs challenged the validity of a dual purpose lease as applied to a property located partially in the protective buffer area of a storage field operated by Columbia Gas Transmission, LLC. The habendum clause provided not only that the lease would remain in force so long as the property was utilized in search for or in production of oil or gas, but also so long as it was used alone or conjointly with neighboring lands for storage of gas or for the protection of stored gas. Columbia subleased production rights under the lease to Range, and subsequently assigned its interest in the production sublease to NiSource Energy Ventures, LLC. The plaintiffs argued that the lease could not maintain both the storage and production rights because only a portion of their land was located in the buffer area, and because none of their land was located above the area designated as containing stored gas. They further argued that the sublease to Range operated as an assignment, severing the productiRQDQGVWRUDJHULJKWVíD challenge left open by the court in Penneco.

After a bench trial, Chief Judge Joy Flowers Conti found that Columbia was in fact using the property for the protection of stored gas, and that this held the lease in effect for all purposes, and thus allowed NiSource Energy Ventures and Range Resources to retain the benefit of the associated production rights. Significantly, the decision directly confronted the argument that storage and production rights are severable, an argument left open in Penneco. The court held that even if production and storage rights were severable, the lease remained in effect for all purposes. Assuming that the ruling in Mason is affirmed on appeal, it may close the door on attacks on dual purpose leases in Pennsylvania, even where lessees sublease production rights to production companies.2

D. Deduction of Post-Production Expenses – Pollock v. Energy Corporation of America

It is well-established, under Pennsylvania law, that a lease providing that royalties are calculated on the price “at the wellhead” generally allows the lessee to deduct post-production costs. See generally Kilmer v. Elexco Land Services, Inc., 990 A.2d 1147 (Pa. 2010). Nonetheless, that decision has not settled the question definitively – there continue to be lawsuits, and decisions, exploring the limits of the Kilmer decision and shifting the terrain of battle from the abstract question whether post-production costs can be deducted to which post-production costs may appropriately be deducted, and under what circumstances.

For example, the long-running case of Pollock v. Energy Corporation of America – which has now proceeded past trial and to final judgment – challenged a number of ECA’s deductions. The court initially rejected many of the plaintiffs’ arguments on summary judgment (including a challenge to the method in which ECA allocated gathering, compression and dehydration costs, a challenge to

2 The author represents NiSource Energy Ventures, LLC in this dispute.

11 ECA’s deduction of marketing costs, and an effort to recover the upside from ECA’s participation in hedging transactions). Even so, the case moved forward as to ECA’s deduction of interstate transportation costs and marketing fees that allegedly were incurred after ECA sold and transferred title to the gas. (Under Kilmer, post-production costs are defined as “expenditures from when the gas exits the ground until it is sold.” 990 A.2d at 1149 n.2.) See Pollock v. Energy Corp. of Am., 2013 WL 275327 (W.D. Pa Jan. 24, 2013), adopting 2012 WL 6929174 (W.D. Pa. Oct. 24, 2012).

After certifying a class on these issues, the case went to trial in March 2015, to enable ECA to attempt to prove that it actually incurred these charges before title to the gas transferred to its purchaser. At trial, the jury rejected ECA’s arguments and held that ECA had improperly deducted post-sale transportation and marketing costs. On June 18, 2015, the trial court denied ECA’s post-trial motion, and upheld a verdict for approximately $912,000 plus interest. See Pollock v. Energy Corp. of Am., 2015 WL 3795659. The matter is now on appeal.

This is not likely to be the end of these disputes – new actions continue to be filed. Perhaps the most well-publicized of these cases is the RICO lawsuit filed in February 2015 against Chesapeake Energy Corp. That lawsuit, A&B Campbell Family, LLC v. Chesapeake Energy Corp., No. 3:15-cv-00340 (M.D. Pa.), alleges that Chesapeake underpaid royalties by basing payments on artificially low gas prices and by deducting post-production costs in impermissible and excessive amounts. The suit arose, in part, from Chesapeake’s widely-reported sale of midstream assets to Access Midstream Partners, L.P.; plaintiffs allege that this involved Access’s payment of an artificially-inflated sale price, offset through artificially-inflated transportation charges paid to Access, that effectively created an “off-balance sheet” loan to Chesapeake. The matter remains pending: after a flurry of motions to dismiss, the plaintiffs filed an amended complaint (attempting to bolster their antitrust claims).

More recently, XTO Energy, Inc. was hit with a putative class action contending that it impermissibly deducted post-production expenses, allegedly in violation of the terms of the operative leases (which set a royalty of “one-eighth (1/8) of the proceeds received from time to time by lessee for all gas . . . produced, metered and sold, less lessor’s pro rata share of any severance or excise tax imposed by any governmental body”). See Marburger v. XTO Energy, Inc., No. 2:15-cv- 00910 (W.D. Pa.).

Further, in light of recent controversies, the General Assembly continues to debate legislative measures to address the issue. Most recently, in June 2015, a bipartisan group of legislators proposed House Bill 1391, providing that the 12.5% minimum royalty provided by the Guaranteed Minimum Royalty Act, 58 P.S. § 33.3, could not be reduced through the deduction of post-production or other costs. The bill also contains fee-shifting and treble damage provisions for willful underpayment of royalties. A similar bill passed committee review last year, with bipartisan support, but stalled on the floor of the House.

12 E. Change of Ownership Clauses – Danko Holdings LP v. EXCO Resources (PA) LLC

Most oil and gas leases have a “change in ownership” clause, providing that no transfer of the property by the lessor binds the lessee until the lessee is provided with sufficient notice and documentation of the change. Until recently, no decision had considered the effectiveness of these provisions under Pennsylvania law.

On September 29, 2014, Judge Brann of the Middle District of Pennsylvania held, in Danko Holdings LP v. EXCO Resources (PA) LLC et al., 57 F. Supp. 3d 389, that an extension payment made by the defendant’s predecessor to the original lessors successfully extended the original lease, even though the original lessors had subsequently sold their interest to plaintiff, because neither plaintiff nor its predecessor satisfied the lease’s express change of ownership provision.

The lease at issue contained a five-year primary term expiring on May 2, 2010. It provided, however, for an additional five-year extension of the primary term. It also provided that “Lessee shall not be bound by any change in the ownership of the Leasehold until furnished with such documentation as Lessee may reasonably require. Pending the receipt of documentation, Lessee may elect either to continue to make or withhold payments as if such a change had not occurred.”

Although plaintiff Danko Holdings obtained title to a portion of the surface estate of the leased premises, neither Danko nor the original lessors provided notice of the change of ownership. Accordingly, when EXCO’s predecessor sought to extend the Lease, it made the requisite extension payment to the original lessors.

On January 13, 2014, Danko sued EXCO, seeking a declaration that the Lease expired by its own terms and asserting claims for ejectment, trespass, and conversion, because Danko did not receive the lease’s extension payment.

The court dismissed, ruling that the plain language of the change in ownership clause applied, and that EXCO and/or its predecessors extended the term of the Lease by making the extension payment to the original lessors. The court held it irrelevant whether EXCO or its predecessors had any actual or constructive notice of the ownership change. Id. at 394-98.

In the absence of Pennsylvania authority on the effect of a change of ownership provision in an oil and gas lease, the court relied on case law from other jurisdictions as well as oil and gas law treatises in granting EXCO’s motion to dismiss. The court specifically stated that “constructive notice is generally not sufficient to obviate the language of a change of ownership provision that specifically requires a lessor to provide documentation.” Furthermore, “[a]lessee should not be subject to liability both to make delay payments and to investigate the ownership of the property each time it makes payment.” Id. at 396-97. An appeal to the Third Circuit is pending.

13 The decision, if affirmed on appeal, confirms that oil and gas operators are under no continuing duty to search public property records, in order to confirm that their leases have not been affected by lessors’ ensuing property transactions, and that lessees may put the burden on lessors or lessors’ successors to provide formal written notice of intervening property transfers.

F. Pooling Issues and Missing or Non-Consenting Oil and Gas Owners – Hilcorp Energy Co. v. DEP, In re Hill, and EQT Production Co. v. Opatkiewicz

In most cases, the ability to “pool” contiguous lands into a single production unit is a necessary precondition to drilling horizontal wells in Pennsylvania, given the relatively-small tracts that are prevalent in most of the Commonwealth. While provisions expressly allowing such pooling are uniformly found in modern oil and gas leases, there remain instances where such pooling is unavailable. For example, “hold-outs” may hinder or prevent the efficient development of oil and gas resources. In other cases, missing co-owners of oil and gas rights cannot be located. In the final case, property may be governed by an existing lease that does not expressly provide for pooling. There are statutory provisions intended to address, under certain circumstances, all three of these scenarios. However, these statutes are largely untested, and it remains to be seen whether or how successfully they can ensure the fair and efficient exploitation of the Commonwealth’s resources.

Oil and Gas Conservation Law: It is a common misconception that “Pennsylvania has no forced pooling.” While that may be true for wells advanced into the Marcellus Shale or shallower formations, deeper formations – including the Utica Shale –may be subject to involuntary unitization under the 1961 Oil and Gas Conservation Law, 58 P.S. §§ 401 et seq. Under Section 7 of the Conservation Law, the “Oil and Gas Conservation Commission” under certain circumstances may establish well spacing and drilling units, id. § 407. Thereafter, under Section 8, the Commission, “[i]n the absence of voluntary integration . . . , upon the application of any operator having an interest in the spacing unit, shall make an order integrating all tracts or interests in the spacing unit for the development and operation thereof and for the sharing of production therefrom,” id. § 408(a).

The Conservation Law only applies to formations below the Onondaga, however. Further, it appears that the “Oil and Gas Conservation Commission” never got off the ground. As a result, until recently there was no indication that any operator had sought an involuntary unitization of tracts into a production unit.

In July 2013, Hilcorp Energy Company sought to revitalize the Conservation Law, asking the Department of Environmental Protection to establish well spacing and drilling units for several thousand acres of the Utica Shale in Lawrence and Mercer Counties. DEP told Hilcorp to seek relief from the Environmental Hearing Board, and the EHB in turn told Hilcorp to refile its application with DEP. See Hilcorp Energy Co. v. DEP, 2013 WL 6337842 (Pa.

14 Envt’l Hearing Bd. Nov. 10, 2013). Hilcorp did so, but the process proved interminable: DEP first appointed an independent hearing officer, and then rescheduled the hearing multiple times amid myriad disputes over the Conservation Law’s constitutionality and various parties’ right to participate. Ultimately, in September 2014, Hilcorp made a business decision not to proceed with the application.

Accordingly, while this remains a legally-prescribed mechanism for ensuring the rational development of Utica Shale resources, it remains untested.

Dormant Oil and Gas Act: A related issue involves missing co-owners of an oil and gas estate. In many cases, oil and gas rights (especially those that were severed from the surface estate) have been fragmented over the years, passing through generations of heirs. In some cases, locating these heirs – in order to obtain a lease from all owners of the oil and gas rights to a particular tract – is difficult or even impossible.

Pennsylvania’s Dormant Oil and Gas Act (“DOGA”), 58 P.S. § 701.1 et seq., attempts to ameliorate these difficulties, “facilitat[ing] the development of subsurface properties by reducing the problems caused by fragmented and unknown or unlocatable ownership of oil and gas interests…,” id. § 701.2. (Unlike similar acts in other states, it does not attempt “to vest the surface owner with title to oil and gas interests that have been severed from the surface estate,” id.)

Under the DOGA, any person or entity with an interest in oil and gas may petition the court to create a trust in favor of absent owners (those whose identities or whereabouts cannot be located). Id. § 701.4(a). To obtain such a trust, the petitioner must show both that it has undertaken a diligent but unsuccessful effort to locate other owners, and that a trust is in the best interest of all owners. Id. § 701.4(b). A DOGA trust remains in force until all unknown owners are identified and have received their share of funds. Id. § 701.5(c).

To date, DOGA has had little apparent impact. In part, this could be because Pennsylvania’s “off the rack” rules allow one tenant in common to develop a property’s oil and gas resources, with absent co-tenants sharing proportionately in the net proceeds. See generally Lichtenfels v. Bridgeview Coal Co., 496 A.2d 782 (Pa. Super. Ct. 1985).

A recent decision, however, shows that DOGA’s strict “diligence” requirement may also limit its applicability. In In re Hill, Chesapeake Appalachia LLC sought a DOGA trust as to a tract in Bradford County. Although the Court of Common Pleas initially granted the request, additional interested parties moved for reconsideration, on the ground that Chesapeake had not satisfied its due diligence obligation under DOGA. The court granted the motion, vacated the order creating the trust, and dismissed Chesapeake’s petition without prejudice. The Superior Court dismissed the ensuing appeal, on the ground that the trial court’s order was

15 not final and appealable, viewing the trial court’s order as one effectively directing Chesapeake to go back to the drawing board and re-file its petition. See In re Hill, No. 1125 MDA 2013 (Pa. Super. Ct. Apr. 21, 2014). The Superior Court stayed the appeal, in order to permit Chesapeake to obtain a final order and, when Chesapeake did not do so, quashed the appeal. See In re Hill, , No. 1125 MDA 2013 (Pa. Super. Ct. May 22, 2014).

Senate Bill 259: As noted above, historical leases in many cases would not expressly permit the leased premises to be combined into a pooled production unit with other properties. In 2013, the General Assembly amended the Oil and Gas Lease Act to address this situation, providing that, “[w] here an operator has the right to develop multiple contiguous leases separately, the operator may develop those leases jointly by horizontal drilling unless expressly prohibited by a lease.” 58 P.S. § 34.1. In such a case, royalties are determined (absent agreement by all affected owners) based upon the producer’s reasonable attribution to each lease. Id.

EQT Production Company attempted to utilize this provision to form a drilling unit in Allegheny County, but the affected lessees objected, compelling EQT to seek a declaratory judgment upholding its rights to combine sixteen leases into a single unit. Judge Christine Ward entered judgment on the pleadings, rejecting the landowners’ constitutional challenges. Judge Ward held that the pooling provision in Section 34.1 was not an ex post facto law, did not impair the obligations of contracts, did not effect an unconstitutional taking without just compensation, and did not violate the landowners’ inherent and indefeasible right to possess their property. See EQT Prod. Co. v. Opatkiewicz, No. GD-13-13489 (C.C.P. Allegheny C’ty July 22, 2013).

Although Judge Ward certified the matter for interlocutory appeal, it appears that the Superior Court did not accept the appeal. As such, these issues have yet to be resolved by an appellate court.

III. Title-Related Litigation

A. “Tax Washing” – Herder Spring Hunting Club v. Keller

One of the most hotly-contested issues in oil and gas law in recent years involves the validity of historical tax sales on severed oil and gas interests. It is commonplace for oil and gas rights in Pennsylvania to have been severed from the surface estate by predecessors-in-title. It was also commonplace for surface owners, in the mid-20th century, to employ a variety of machinations to seize back these subsurface rights surreptitiously.3

3 For example, some surface owners would bring adverse possession claims, contending that they had adversely possessed subsurface rights even in the absence of actual production.

16 Under an 1806 statute, “every person . . . becoming a holder of unseated lands” – that is, undeveloped property – was obligated to make a detailed report of his or her lands to the county commissioners, so that those properties could be assessed and taxed. Act of March 28, 1806, P.L. 644, 72 P.S. § 5020-409. Historically, property taxes on such land were deemed to be assessed against the land itself, in rem, and landowners in the past have attempted to “wash” their title – thereby gaining title to previously-severed oil and gas interests – by defaulting on the taxes and buying the property back at the ensuing tax sale. They have argued that, absent explicit declaration of a retained oil and gas interest at the time of severance, the assessment (and tax sale) encompassed the entire estate, including severed oil and gas rights. Of note, because the taxes were deemed to be owed by the property in rem, these tax sales were conducted without any effort to provide individual notice to the affected owners that their property rights might be appropriated.

This question is now before the Pennsylvania Supreme Court, in the wake of a Superior Court decision upholding the divestiture of severed oil and gas interests through a tax sale of the surface. See Herder Spring Hunting Club v. Keller, 93 A.3d 465 (Pa. Super. Ct. 2014), alloc. granted, 108 A.3d 1279 (Pa. 2015).

In Herder Spring, then-owners Harry and Anna Keller sold the surface of a parcel in Centre County in 1899, reserving to themselves the subsurface rights. The record did not contain evidence that the Kellers reported this severance to Centre County officials at the time. Thereafter, in 1935, Centre County obtained the property at a tax sale, and thereafter sold the property to Herder Spring’s predecessor-in-title in 1941.

In 2008, Herder Spring sought a declaration that the 1935 seizure terminated the 1899 deed reservation county’s move to repossess the land in 1935 effectively extinguished the 1899 reservation of subsurface rights. The Court of Common Pleas ruled in the Kellers’ favor, holding that the reserved oil and gas estate could not be taxed absent oil and gas production, and thus could not have been assessed and could not have been sold at the 1935 tax sale. The trial court also pointed to

These owners would then aver, in conclusory fashion, that the record owners of the subsurface could not be located, and thus would obtain authorization for service by publication only. When the record owners predictably failed to respond to notice provided only by a small-print legal advertisement in the back pages of a rural newspaper, the surface owners would then take a default judgment. A number of cases challenging this process are presently working their way through Pennsylvania courts. See, e.g., N. Forests II, L.P. v. Keta Realty Co., No. 88-02,356 (C.C.P. Lycoming C’ty Feb. 8, 2013) (striking default judgment against owners of reserved subsurface estate, for failure to comply with applicable rules), appeal pending, Nos. 1007 & 1054 MDA 2014; id. (C.C.P. Lycoming C’ty May 20, 2014) (entering judgment on the pleadings against the successors to the surface owner on their adverse possession claim against the owners of the reserved subsurface estate, for failure to allege actual production of oil and gas), appeal pending, Nos. 1007 & 1054 MDA 2014. (In the Northern Forest v. Keta matter, the author is counsel for a successor-in-title to the entity reserving subsurface rights.)

17 facts showing that Herder Spring knew of the Kellers’ 1899 reservation and included language in its deed acknowledging it, and thus was estopped from challenging the Kellers’ rights.

The Superior Court reversed, holding – in the absence of proof that the Kellers declared their reservation – that the tax sale conveyed the entire property. “When the property was horizontally severed in 1899, the Kellers never informed the county commissioners of their retention of the subsurface rights to the land after selling the surface rights. Pursuant to the act, it was their affirmative duty to do so. . . . Therefore, when the commissioners finally sold the property in 1941 . . . they sold what had been taken, the entire property.” 93 A.3d at 472.

The Superior Court “that our resolution of this matter is at odds with modern legal concepts,” and that “[t]his resolution may be seen as being unduly harsh.” Nonetheless, the court held its nose and approved the divestiture of property rights: “We do not believe it proper to reach back more than three score years to apply a modern sensibility and thereby undo that which was legally done.” Id. at 473.

The Supreme Court accepted the Kellers’ petition for allowance of appeal, to address the following issues: x Did the Superior Court err by failing to strictly construe the 1806 tax statute and by ignoring or misconstruing prior Supreme Court holdings? The Kellers and their amici curiae pointed out that the statute applied only to “lands,” and the tax status of oil and gas as “land” at the time was ambiguous at best. They also noted that the statute applied only to those “becoming a holder of unseated lands,” and not to those retaining a partial real property interest after conveying the remainder. Finally, they point out that the statute explicitly provided a remedy other than forfeiture for non-compliance (a four-fold tax penalty). x Did the Superior Court deny the Kellers’ due process rights under the United States and Pennsylvania Constitutions, by approving a tax sale that proceeded without “notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections,” Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950)? x Did the Superior Court err in declining to hold that a grantee is bound by prior exceptions and reservations cited in its deed? x Did the Superior Court err in making a factual finding that the Kellers never notified the Centre County Commissioners of their severed oil and gas estate, in the absence of evidence one way or the other?

18 Of course, Herder Spring and its amici curiae would answer all of these questions in the negative. Briefing is complete, and the parties are awaiting an argument date from the Court.

Of note, the Supreme Court’s resolution of this issue is not likely to end litigation on these issues. Even if it upholds the Superior Court’s ruling, the validity and scope of individual tax sales likely will still need to be decided on a case-by-case basis. As a result, the Supreme Court’s ruling may just shift the focus of argument to other issues. In short, stay tuned for more developments on these issues.4

B. Title Searching and Trespass Claims – Sabella v. Appalachian Development Corp.

In an ideal world, title disputes are raised and resolved before drilling or production commence on a property. That is not always the case, however. Indeed, given the Supreme Court’s rejection of equitable tolling, see supra § II.A, producers may increasingly be compelled to commence drilling before resolving title disputes, to protect their lease investment.

Drilling and production in the absence of clear title bear unquestionable perils for the operator, who risks being held – depending upon the outcome of the title dispute – to be a trespasser. The best case scenario – if the operator is found to have acted in good faith – is disgorgement of the trespasser’s net profits. If, however, the operator is held to have trespassed in bad faith, it must pay over all proceeds derived from the trespass, without offset for the cost of generating those funds. See generally Sabella v. Appalachian Dev. Corp., 103 A.3d 83 (Pa. Super. Ct. 2014).

The Superior Court’s recent decision in the Sabella case highlights those risks. In Sabella, plaintiff Sabella was the owner of severed oil, gas and mineral rights pursuant to a duly-recorded 1997 tax sale deed. In 2001, Appalachian Development signed an oil and gas lease with the surface owners, apparently unaware of the recorded deed showing that the surface owners did not in fact own 66 acres of subsurface rights beneath their property. Appalachian then transferred its interest in the lease to two drillers, the Haners, who drilled a number of wells on the property. Importantly, the Haners only commissioned a “bring down” title search, and did not perform a full title search.

When Sabella learned of the drilling, he brought suit, seeking ejectment (promptly ordered on summary judgment) and damages for trespass and conversion. After an ensuing trial, the Court of Common Pleas found that the Haners were liable for trespass (both good-faith and bad-faith) and conversion. The Haners appealed,

4 The author represents before the Supreme Court, as amici curiae, the descendants of several large holders of reserved oil and gas estates.

19 and Sabella cross-appealed the determination that the Haners’ trespass was even partially in good faith.

On appeal, the Superior Court rejected the Haners’ arguments, but ruled in favor of Sabella on his cross-appeal. The court relied principally upon the fact that Sabella’s ownership of the subsurface was a matter disclosed in public deed records, thereby placing the Haners on constructive notice of Sabella’s ownership pursuant to 21 P.S. § 357. In short, as the court concluded:

In declining to conduct a full title search, when such would have revealed conclusively Sabella’s ownership of the OGMs, the Haners lost their claim to bona fide purchaser status and their recourse to the protections accorded with that status. . . . Because the Haners were not good-faith purchasers of the OGMs, they were entitled to no offsets whatsoever; rather, Sabella was entitled to recover the entirety of the revenues the Haners derived from their production upon Sabella’s OGMs.

Id. at 104.

The decision in Sabella has a number of implications for oil and gas producers:

x The Superior Court holds that producers who develop a property without performing a full title search do so at their peril. Given the presence of historical reservations of oil, gas and mineral rights – some more than 100 years old, see supra § III.A – this may impose a substantial burden.

x The Superior Court’s ruling, when coupled with Harrison v. Cabot Oil & Gas, also potentially places producers between a rock and a hard place in situations where there are legitimate disputes over title. If the producer awaits resolution of the dispute, the lease’s primary term may run before the lessee can take the necessary steps to continue the lease into its secondary term. On the other hand, if the lessee takes steps to continue the lease in force during the pendency of a title dispute, it risks losing any benefit from those expenditures.

C. Ownership of Coalbed Methane – Kennedy v. Consol Energy, Inc.

There also remain other questions about the ownership of subsurface rights. For example, although it has been the law of Pennsylvania for more than 20 years that coalbed methane presumptively belongs to the owner of the coal seam, see United States Steel Corp. v. Hoge, 468 A.2d 1380 (Pa. 1983), the Superior Court just this year addressed issues surrounding the ownership and production of coalbed methane, see Kennedy v. Consol Energy, Inc., 116 A.3d 626 (2015), alloc. pending.

The Kennedy plaintiffs owned oil and gas rights beneath a large tract in Greene County, but Consol owned the coal underlying the property, and CNX Gas

20 Company drilled wells into the Pittsburgh coal in order to produce coalbed methane. The trial court made short work of the Kennedys’ quiet title claims, relying on Hoge.

The Superior Court affirmed. Although the court did not read Hoge as establishing a per se rule – holding that it merely established a presumption – the court found the language of the relevant instruments in Hoge and Kennedy as functionally indistinguishable.

The court also rejected the Kennedys novel effort to suggest that possible wellbore deviations into the overlying rock formation – through an extension of the “confusion of goods” doctrine – required that all proceeds from gas production be paid over, merely because some minuscule, but unquantifiable, volume of natural gas may have been extracted from those overlying formations.5

IV. Robinson Township v. Commonwealth – Next Steps and Emerging Issues

More than a year and a half after the Pennsylvania Supreme Court’s decision in Robinson Township v. Commonwealth, the state of the law remains unsettled, and many of the questions left open by the plurality’s sweeping opinion remain unanswered.

A. To Recap…

The Supreme Court’s Robinson Township decision(s) have become well known (some would say infamous):

x Shortly after the enactment of Act 13 of 2012, a comprehensive legislative effort to address various policy issues that had arisen as a result of the Marcellus shale “boom” in northern and western Pennsylvania, it came under attack from a variety of challengers. The core challenge was to Act 13’s restrictions on local regulation of oil and gas activities, and its state- wide land use standards for oil and gas operations.

x The Commonwealth Court held 4-3 that this statewide land use regime violated substantive due process, purportedly because it “allow[ed] incompatible uses in zoning districts,” failed to “protect the interests of neighboring property owners from harm, alter[ed] the character of the neighborhood, and ma[de] irrational classifications.” Robinson Twp. v. Commw., 56 A.3d 463, 485 (Pa. Commw. Ct. 2012).

x On appeal, the Supreme Court agreed, but its decisions were fractured and there was no majority. Chief Justice Ronald Castille’s plurality opinion found that Act 13’s statewide land use violated the Pennsylvania

5 The author represents the defendants in this matter in connection with the pending petition for allowance of appeal.

21 Constitution’s Environmental Rights Amendment, Article I, Section 27. Robinson Twp. v. Commw., 83 A.3d 901 (Pa. 2013).

x The plurality viewed Article I, Section 27 to “require[] each branch of government to consider in advance of proceeding the environmental effect of any proposed action.” Id. at 952.

x The plurality also for the first time gave municipalities independent authority, not flowing from an explicit state grant of power, ruling that the General Assembly “has no authority to remove a political subdivision’s implicitly necessary authority to carry into effect its constitutional duties.” Id. at 977.

x Finally, the plurality construed the Amendment to be self-executing, creating “a constitutional right personal to each citizen” that is judicially enforceable. Id. at 951 n.39; see also id. at 974.

x The plurality’s application of these principles appeared to reflect a deep hostility to shale gas development, in the absence of a fully-developed record that would support such a conclusion:

By any responsible account, the exploitation of the Marcellus Shale Formation will produce a detrimental effect on the environment, the people, their children, and future generations, and potentially on the public purse, potentially rivaling the environmental effects of coal extraction.

Id. at 976.

B. On Remand…

On remand, the Commonwealth Court addressed the issues that remained following the Supreme Court’s ruling. Robinson Twp. v. Commw., 96 A.3d 1104 (Pa. Commw. 2014). On the key regulatory and land use issues, the court ruled as follows:

x The court held that 58 Pa.C.S. § 3302 of Act, which provided that municipalities cannot regulate areas already covered by the Oil and Gas Act, was severable and valid. 96 A.2d at 1120. This confirms the continued validity of Range Resources – Appalachia v. Salem Twp., 964 A.2d 569 (Pa. 2009) – holding that municipalities cannot regulate matters that are within the scope of the Oil and Gas Act – as codified in Section 3302.

x The court held that 58 Pa.C.S. § 3218.1, requiring DEP to provide notice of spills to public water supplies, was not an invalid special law. 96 A.3d at 1111-14.

22 x The court did hold that 58 Pa.C.S. §§ 3305 through 3308 – permitting the Public Utility Commission to review local ordinances – was not severable from those portions of Act 13 that the Supreme Court had invalidated. 96 A.3d at 1120-22. (The PUC has asked the Supreme Court to review this aspect of the decision.)

x As discussed below, see infra § VI.C, the court upheld provisions protecting proprietary information in the health care context.

Most recently, the Pennsylvania Independent Oil and Gas Association has sought to intervene in Robinson Township, requesting an order enforcing the judgment. IOGA contends that DEP is improperly applying the provisions of Act 13’s now- invalidated Section 3215(c), which required DEP to consider impacts upon a variety of natural and public resources in the course of reviewing a drilling permit application. (Accompanying this filing was a stand-alone petition for review in Commonwealth Court, seeking the same relief.)

C. The Commonwealth Court Revisits and Narrows Robinson Township – Pennsylvania Environmental Defense Fund v. Commonwealth and Other Decisions

The most significant decision to consider the effect of Robinson Township is the Commonwealth Court’s January 7, 2015 decision in Pennsylvania Environmental Defense Fund v. Commonwealth, 108 A.3d 140, which rejected a challenge to the Commonwealth’s allocation of oil and gas lease revenues. PEDF argued that Article I, Section 27 required funds generated from oil and gas leasing and extraction on public lands to be segregated from general revenues and spent for environmental protection or natural resource conservation, but the Commonwealth Court disagreed.

The most significant aspect of the PEDF case, going forward, is the Commonwealth Court’s conclusion that Robinson Township’s broad-ranging plurality opinion is not binding precedent. Further, the Court treated it as persuasive precedent “only to the extent it is consistent with binding precedent from this Court and the Supreme Court on the same subject.” 108 A.3d at 156 n.37. As a result, the court continued to apply the three-part test set out in Payne v. Kassab, 312 A.2d 86 (Pa. Commw. Ct. 1973): (1) Was there compliance with all applicable statutes and regulations relevant to the protection of the Commonwealth’s public natural resources? (2) Does the record demonstrate a reasonable effort to reduce environmental incursion to a minimum? (3) Does the environmental harm which will result from the challenged decision or action so clearly outweigh benefits so as to be an abuse of discretion? 312 A.2d at 29-30.

Applying the Payne test, the court rejected the supposition that all revenue from the sale or leasing of natural resources “must be funneled to these purposes and these purposes only,” and that it is sufficient that those funds be used “for the benefit of all people.” 108 A.3d at 168.

23 Also important to the Commonwealth Court’s reasoning – and to continuing efforts to give content to Robinson Township – is the explicit recognition that economic development is a legitimate state goal, that the Pennsylvania Constitution is intended to balance environmental protection with economic development, and that Article I, Section 27 was not intended to derail economic development that would lead to an increase in the general welfare. 108 A.3d at 156-57, 170.

Courts’ efforts to keep Robinson Township within reasonable bounds are also reflected in observations in other decisions: x In Feudale v. Aqua Pennsylvania, Inc., 2015 WL 4461069 (Pa. Commw. Ct. July 22, 2015), the court dismissed, on preliminary objections, claims for improper management of state forest lands in connection with a water line replacement, on the ground that the petitioner had failed to exhaust administrative remedies by appealing DEP’s permit issuance to the Environmental Hearing Board. In so doing, the Court also found petitioners’ constitutional challenge to be without merit. Id. at *3-*4. The court reiterated its reliance on Payne v. Kassab to evaluate governmental compliance with Article I, Section 27, and observed that “merely to assert that one has a common right to a protected value under the trusteeship of the State, and that the value is about to be invaded, creates no automatic right to relief.” Id. at *4 (quoting PEDF, 108 A.3d at 158). x In Duke Energy Fayette II, LLC v. Fayette C’ty Bd. of Assessment Appeals, 116 A.3d 1176 (Pa. Commw. 2015), the court – in the context of a tax assessment challenge – cited Justice Saylor’s dissent for the proposition that municipalities are creatures of the General Assembly and that “the latter’s dictates” are “preeminent.” Id. at 1180. x In ION Geophysical Corp. v. Hempfield Township, 2014 WL 1405397, at *7 (W.D. Pa. Apr. 10, 2014), the court declined to consider the effect of Robinson Township on other aspects of the Oil and Gas Act, holding that it would not presume that Robinson Township had an effect on existing pre- Act 13 laws. x The Environmental Hearing Board, for its part, faithfully applies PEDF, and thus continues to analyze compliance with Article I, Section 27 using Payne v. Kassab. See Sludge Free UMBT v. DEP, 2015 WL 4410439, at *2-*3 (Pa. Envt’l Hearing Bd. July 1, 2015); Tri-County Landfill v. DEP, 2015 WL 3486003, at *2 & n.3 (Pa. Envt’l Hearing Bd. May 22, 2015); Brockway Borough Mun. Auth. v. DEP, 2015 WL 1968630, at *17-*18 (Pa. Envt’l Hearing Bd. Apr. 24, 2015)

24 D. Efforts to Apply and Extend Robinson Township

Not surprisingly, given the plurality opinion’s broad statements – and notwithstanding the Commonwealth Court’s effective disregard of that plurality opinion as a rule of decision x– citizen groups now appear to view Robinson Township as “a case for all seasons.” It is now routinely dropped into a wide variety of regulatory and legal challenges to state and private party actions.

As one example, Robinson Township’s most inflammatory “findings” were cited in Gorsline v. Board of Supervisors of Fairfield Township, No. 14-000130 (C.C.P. Lycoming C’ty Aug. 29, 2014), which invalidated a conditional use permit for a well pad as inconsistent with the governing ordinance. (The landowners in that matter were represented by attorneys from PennFuture.) An appeal of that decision has been argued, and a decision from the Commonwealth Court is pending.

Citizen groups are also attempting to leverage Robinson Township’s plurality opinion in regulatory settings:

x For example, in September 2014, three groups appealed a DEP ruling permitting Range Resources to beneficially use vertical drill cuttings for well pads and access roads. While the groups offered procedural and substantive objections to the DEP decision, the core of their appeal was the contention, citing Robinson Township, that the DEP failed to consider the impact that its decision would have on “public trust resources,” an impact analysis that the Robinson Township plurality can be read to require. Delaware Riverkeeper Network v. DEP, No. 2014-128 (Pa. Envt’l Hearing Bd.). (That appeal remains pending.)

x See also Sludge Free UMBT v. DEP, 2015 WL 4410439, at *2-*6 (Pa. Envt’l Hearing Bd. July 1, 2015) (citizen groups and local residents argue that Article I, Section 27 precluded DEP approval of permit for land application of biosolids); Tri-County Landfill v. DEP, 2015 WL 3486003, at *2 -*7 (Pa. Envt’l Hearing Bd. May 22, 2015) (intervenors unsuccessfully argued that Article I, Section 27 compelled DEP to deny landfill expansion permit); Brockway Borough Mun. Auth. v. DEP, 2015 WL 1968630, at *17-*18 (Pa. Envt’l Hearing Bd. Apr. 24, 2015) (rejecting water authority’s argument that DEP’s oil and gas permit violated Article I, Section 27, because DEP permit complied with Payne v. Kassab).

E. What’s Next?

The ultimate impact of Robinson Township remains unclear. As discussed above, the Commonwealth Court and EHB both have declined to apply the plurality’s sweeping interpretation of Article I, Section 27, and have continued to apply Payne v. Kassab’s three-part test to assess compliance with the amendment.

25 Nonetheless, litigants continue to cite the plurality, and it would appear to be a matter of time before the issue comes before the Supreme Court again. In that event, would the Court as a whole speak so broadly? (Of note, only one of the members of the Robinson Township plurality – Justice Todd – remains on the Court.)

What Robinson Township may (or may not) mean: x State-wide land use regulation, for all practical purposes, may now be impossible. (For example, could the General Assembly now mandate affordable housing or medical care facilities in all districts?) x Local zoning may now be “constitutionalized,” i.e., there might be a constitutional right to retain a particular zoning classification, enforceable by municipalities and landowners. (For example, can the General Assembly, having given municipalities the right to enact zoning ordinances, withdraw that authorization? Do citizens’ “reasonable expectations” about existing zoning prevent a municipality from ever allowing more intensive land uses in an existing district?) x There may now be a “constitutional tort” available to challenge just about any governmental act. (After all, “it is difficult to conceive of any human activity that does not in some degree impair the natural, scenic and esthetic values of any environment.” Payne v. Kassab, 312 A.2d 86, 94 (Pa. Commw. Ct. 1973).) The Commonwealth Court seemed to assume as much in Feudale, even though it rejected the claim on the merits.

And indeed, even under the Payne v. Kassab standard, there remains considerable room for argument, on questions that are inherently situation- specific: Was there a reasonable effort to minimize the environmental incursion? Does the environmental harm outweigh the benefits? See, e.g., Sludge Free UMBT v. DEP, 2015 WL 4410439, at *4-*6 (Pa. Envt’l Hearing Bd. July 1, 2015) (denying summary judgment because of questions of fact about DEP’s compliance with Payne v. Kassab’s second and third prongs). x Article I, Section 27 may allow indirect challenges to purely private activity, on the theory that governmental bodies have failed to restrain it. (If the Amendment gives rise to “a duty to refrain from permitting or encouraging the degradation, diminution, or depletion of public natural resources, whether . . . through direct state action or indirectly, e.g., because of the state’s failure to restrain the actions of private parties,” 83 A.3d at 957 (emphasis added), does this mean that litigants can challenge private activities, on the ground that the government (by failing to regulate or preclude private action) has violated the Amendment?)

26 x There may now a constitutionally-based, judicially-imposed “environmental impact assessment” requirement. (If the Amendment requires the government “to consider in advance the environmental effect of any proposed action,” including not only the actual but also the “likely degradation,” 83 A.3d at 952, 953, does this require that any governmental action be preceded by a formal or explicit assessment of its likely environmental impact? If so, what are the standards?)

V. Emerging Challenges to Midstream Development

To date – despite activist group’s win in Robinson Township, which arguably allows a municipality-by-municipality “war of attrition” over the siting of oil and gas facilities – these groups have had limited success in preventing oil and gas producers from drilling wells. As a result, citizen groups have been shifting their strategy, refocusing on hindering or precluding midstream operations. (The theory seems to be that, by preventing oil and gas from getting to market, groups can limit its upstream production in the first place.)

Given that there is an urgent need for more gathering and transmission pipelines, to resolve supply chain bottlenecks and bring Marcellus and Utica Shale gas to market, this would appear to be a fertile ground for regulatory obstruction by those opposed to oil and gas development.

In the past months, these battles have been playing out over a number of regulatory fronts, involving challenges to air permitting, land use decisions, FERC certificates of public convenience and necessity, etc. Whether these efforts have a material effect on the development of needed gathering and transmission resources, or whether they are simply a “bump in the road,” remains to be determined. What does appear clear, however, is that participants in the midstream industry may expect regulatory challenges at just about any stage in the permitting process, and that pipeline development this will inevitably be more prolonged and more costly.

While Governor Wolf has created a “Pipeline Task Force,” intended to offer policies and guidelines for the build-out of midstream infrastructure, it remains to be seen whether that group will be a constructive or obstructive force. (The task force is ostensibly intended, among other things, to develop best practices for pipeline planning and siting, to identify construction methods to reduce environmental impact, and to develop operations and maintenance plans.) As an initial observation, fewer than one-third of the task force’s 48 members are affiliated with the upstream and midstream industries, and the task force membership is heavily tilted in favor of state and local officials, academics, and members of advocacy groups. The membership of the work groups that will advise the task force is, with only a few exceptions, even more tilted against industry participation. As such, some skepticism may be in order, on the part of the oil and gas industry, about the task force’s ultimate impact.

27 Some of the more notable recent decisions exemplifying these challenges include the following:

A. Air Permitting and Source Aggregation

A principal avenue of attack, by environmental groups seeking to hinder midstream development, is the contention that multiple pipeline facilities constitute a single “source” for air emission permitting purposes. Because that “source’s” potential to emit determines the type of permit that is needed, this contention – if adopted – in many cases would have the effect of requiring more complicated and more costly “major source” permitting and “new source review” under Title V of the Clean Air Act.

The viability of this argument was dealt a substantial, but perhaps not fatal, blow on February 23, 2015, when Judge Mariani in the United States District Court for the Middle District of Pennsylvania entered a summary judgment in Citizens for Pennsylvania’s Future v. Ultra Resources, Inc., 2015 WL 769757.

In 2011, Citizens for Pennsylvania’s Future (PennFuture) sued Ultra, contending that Ultra had violated the Clean Air Act by constructing a major source (allegedly producing more than 100 tons per year of nitrogen oxides) without the proper “new source review” permit. PennFuture’s lawsuit was predicated upon the underlying allegation that eight separate compressor stations in Tioga and Potter Counties together constituted only one “source” of air emissions. (In issuing permits to Ultra, DEP determined that each station should be considered individually.) The relevant regulatory text effectively provided that multiple emitting activities can be considered a single “source” if they (1) are under common control; (2) “are located on one or more contiguous or adjacent properties”; and (3) belong to the same major industrial grouping. 40 C.F.R. § 71.2. The question before the court was whether these compressor stations were “contiguous or adjacent.”

In the absence of Third Circuit precedent on the issue, the court looked to the Sixth Circuit’s decision in Summit Petroleum v. EPA, 690 F.3d 733 (6th Cir. 2012). There, the Court of Appeals applied the plain meaning of the term “adjacent” and overturned EPA’s determination that several gas wells spread across 43 square miles were “adjacent” to a Summit natural gas treatment plant. In so doing, the Sixth Circuit rejected EPA’s view that “functional interdependence” can render spatially-separated facilities “adjacent.” See 2015 WL 769757, at *8.

The PennFuture v. Ultra court also looked to DEP guidance, which considered proximity when determining “aggregation,” and which provided that properties within one-quarter mile of each other could be considered “adjacent.” (The DEP guidance also provided, however, that properties that are further apart can be considered “adjacent” on a case-by-case basis.) See 2015 WL 769757, at *9-*10.

28 Applying these authorities, the court held that the eight compressor stations at issue could not be considered “adjacent,” and “should not be ‘daisy-chained’ together to establish a contiguous grouping.” Id. at *10-*11. These stations – located no closer than three-quarters of a mile apart, within a five-square mile area – were “not connected in any other way, and operate independently of one another,” and “there is no discernable relationship between the individual emission stations.” Id. at *13.

Even so, PennFuture v. Ultra is not a stake through the heart of the argument: x The court would not categorically rule out “functional interrelatedness” as a basis for aggregating multiple sources, for fear that the industry would manipulate the structure of its facilities. “[W]e recognize that to strictly limit that determination so as to never consider functional interrelatedness would run afoul of PADEP’s guidance and could very likely lead to the anomalous situation wherein emitting sources which are clearly functionally related are able to avoid the more stringent standards applicable to major sources under the [Clean Air Act] and state law because of a wooden and inflexible definition of adjacency.” Id. at *14. (The court merely held that PennFuture had not presented any material facts to show that the compressor stations were functionally associated.) x Further, the court had previously denied a motion to dismiss, which argued that PennFuture had forfeited its right to seek judicial review by failing to appeal the permits’ issuance to the Environmental Hearing Board. See 898 F. Supp. 2d 741 (M.D. Pa. 2012). As a result, the decision arguably invites collateral attacks on DEP permits, without following the prescribed method for obtaining judicial review.

The Environmental Hearing Board foreshadowed the difficulties that may confront companies seeking to avoid aggregation of sources in its October 31, 2014 order in National Fuel Gas Midstream Corp. v. DEP, 2014 WL 6537086, denying permittees’ motion for summary judgment on the question of aggregation. There, DEP had determined that a Seneca compressor and a National Fuel Gas dehydrator and generator together qualified as a single source for permitting purposes. Although Seneca and National Fuel Gas sought judgment as a matter of law, Judge Beckman declined the invitation, holding that “The issues of air aggregation in the oil and gas industry are legally and factually complex and the board strongly believes that these issues, which remain a matter of first impression in Pennsylvania, will be best decided with the benefit of a full factual record and post-hearing brief” on this “mixed question of fact and law.” Id. at *9, *7.

29 B. Challenges to Pipeline Companies’ Condemnation and Other Authority as “Public Utilities”

Those opposed to pipeline expansion also are increasingly challenging pipeline companies’ ability to exercise the rights of “public utilities,” including the right to take property by eminent domain and an exemption from local land use regulations.

The experiences of Sunoco Pipeline LC in attempting to construct the Mariner East pipeline demonstrate some of the difficulties pipeline companies have encountered.

Where Sunoco found itself unable to acquire rights-of-way for the Mariner pipeline by agreement, it has sought to invoke the power of eminent domain given to “public utilities.” This argument faced an immediate roadblock in one case: in response to landowner objections, a judge of the York County Court of Common Pleas ruled that Sunoco, regulated by FERC as a “common carrier,” was thus not a “public utility” and could not avail itself of a “public utility’s” powers, including the power of eminent domain. Sunoco Pipeline v. Loper, No. 2013-SU- 4518-05 (C.C.P. York C’ty Feb. 24, 2014).

(Of note, trial court rulings on the issue are not uniform: on November 7, 2014, Judge Gray of the Lycoming County Court of Common Pleas reached a different result in the context of a condemnation initiated by UGI Penn Natural Gas, Inc., holding that UGI PNG was not attempting to take private property for private enterprise, even though the proposed transmission line would serve only one customer. In re Condemnation of Temporary Construction Easement across Lands of Curtis R. Lauchle, Nos. 14-02,219 & 14-0,1791 (C.C.P. Lycoming C’ty).)

Thereafter, in March 2014, Sunoco sought an order from the Pennsylvania Public Utility Commission declaring that it was a “public utility” within the meaning of Section 619 of the Municipalities Planning Code, 53 P.S. § 10619, and that, as such, certain proposed pump and valve stations were exempt from municipal zoning. In the absence of a definition in the MPC, Sunoco sought to invoke the definition contained in Section 1103 of the Business Corporation Law, which included not only those entities subject to regulation by the PUC but also those regulated by “an officer or agency of the United States.” 15 Pa.C.S. § 1103. Because Sunoco was regulated as a common carrier by FERC pursuant to the Interstate Commerce Act, it argued that it qualified as a “public utility” under the MPC.

The Delaware Riverkeeper Network predictably, promptly, and loudly objected, arguing (i) that because Sunoco was a “common carrier,” it was not a “public utility”; and (ii) that Sunoco’s application violated Article I, Section 27 of the Pennsylvania Constitution (relying on the plurality opinion in Robinson Township).

30 Two administrative law judges initially rejected Sunoco’s arguments in July 2015, granting preliminary objections dismissing its amended petitions for lack of jurisdiction, on the ground that it was not a “public utility.”

The full PUC, however, reversed the ALJ ruling in October, holding in a 4-1 decision that Sunoco was a “public utility corporation.” Before the issue could be resolved definitively, however, Sunoco reached agreements with the affected municipalities and withdrew its petitions.

Accordingly, the status of pipeline companies as “public utilities” entitled to exercise the statutory powers given to such entities remains unsettled, and will need to be determined in subsequent administrative proceedings or lawsuits.

C. Case Study – the PennEast Pipeline

The recent experiences of a consortium of companies, proposing a 100-mile pipeline across eastern Pennsylvania and New Jersey, exemplifies citizen groups’ emerging strategy:

x In August 2014, PennEast Pipeline announced its plans, which would deliver up to 1 bcf/day to end users in New Jersey and the northeast.

x In November 2014, the Delaware River Basin Commission – at the behest of the Delaware Riverkeeper Network – announced that PennEast would be required to obtain a permit from it before proceeding.

x In December 2014, a New Jersey state senator introduced a resolution opposing the project, alleging that it would adversely affect water supplies, preserved lands and “our residents’ quality of life,” “could also have a serious impact on property values” and “is wrong for our region.”

x Another state senator and two assemblymen thereafter urged FERC not to certificate the project, claiming among other things that it would “permanently scar an exceptionally pristine, rich agricultural heritage,” “lower property values,” “impact quality of life for residents” and “damage the state’s dwindling open spaces.”

x In February 2015, the New Jersey chapter of the Sierra Club urged FERC to deny the application, claiming that it would cause “the destruction of one of the last remaining stretches of rural New Jersey.”

x In June 2015, environmental groups (including the Delaware Riverkeeper Network and the Pennsylvania and New Jersey chapters of the Sierra Club) urged the DRBC and FERC to hold separate, rather than joint, public hearings on the project, as DRBC had proposed. (Whatever the ostensible justification – the groups protested that DRBC and FERC have “entirely different” and “unrelated missions” – the only certain

31 consequences of accepting this request will be complication, delay and expense.)

x That same month, a coalition of New Jersey organizations announced that it was mobilizing to battle so-called “dirty energy,” with the elimination of all fossil fuels. A key aspect of this, according to the Delaware Riverkeeper Maya Van Rossum, was opposition to pipeline development; she called pipelines “a known and growing source of water pollution, air pollution, forest and wetland devastation” which “threaten our lives and when they fail inflict hundreds of millions of dollars of damage a year.”

x Most recently, in July, Mercer County, New Jersey rescinded authorization for PennEast to conduct survey operations on public land, contending that even the soil borings used in preliminary surveying were “potentially environmentally harmful.”

There is no reason to believe that these efforts will not continue, not only with respect to PennEast, Mariner and Mariner 2, but also with any other efforts to construct midstream gathering and transmission assets.

VI. Other Environmental Litigation Trends

A. Environmental Enforcement Trends

Environmental enforcement, often with substantial civil penalties, also has intensified:

x In September 2014, DEP assessed a $4.2 million civil penalty on consent against Range Resources – Appalachia, LLC, under the Pennsylvania Clean Streams Law and Oil and Gas Act, for alleged leak violations at six surface impoundments in Washington County.

x In October 2014, in connection with a 2012 wastewater spill at a natural gas treating site in Tioga County, DEP filed a complaint for civil penalties against EQT Production Co. in the Environmental Hearing Board, alleging violations of the Clean Streams Law and seeking a $4.5 million civil penalty. See DEP v. EQT Prod. Co., No. 2014-140 (Pa. Envt’l Hearing Bd.).

x In June 2015, DEP assessed an $8.9 million civil penalty against Range Resources – Appalachia, LLC, under the Pennsylvania Clean Streams Law and Oil and Gas Act, based upon Range Resources’ alleged failure to submit a satisfactory plan to repair a leaking gas well impacting surface and groundwater in Lycoming County. Range Resources has appealed this assessment. See Range Resources – Appalachia, LLC v. DEP, No. 2015-099 (Pa. Envt’l Hearing Bd.).

32 The Commonwealth is also beginning to pursue criminal charges in some cases:

x Most notable is the Attorney General’s pursuit of criminal charges against XTO Energy, Inc. for alleged violations of the Clean Streams Law and Solid Waste Management Act, in connection with storage tank spills at a Lycoming County well site. Although XTO moved to dismiss the charges, the Lycoming County Court of Common Pleas denied the motion to dismiss in April 2015. See Commw. v. XTO Energy, Inc., No. CP-41- CR-0002-2014 (C.C.P. Lycoming C’ty Apr. 14, 2015).

x More recently, in October 2014, the Attorney General filed misdemeanor charges against EQT Production Co. in the Environmental Hearing Board, in connection with the 2012 Tioga County wastewater spill, contending that EQT committed “pollution of waters” and “disturbance of waterways” in violation of 18 Pa.C.S. §§ 2502(a) and 2504(a)(2). The Attorney General acted upon the reference of the Pennsylvania Fish and Boat Commission, and at the behest of a number of citizen groups.

With the change in administrations, and the appointment of a DEP secretary who was the former government relations manager for PennFuture, it is reasonable to expect that enforcement efforts will not subside.

B. Contamination Claims

While a number of litigants have alleged bodily injury or property damage due to alleged releases of chemicals during oil and gas production, these cases have proven to be long and difficult for these claimants. Recent developments confirm that this continues to be the case, although the oil and gas industry’s success has not been final or unqualified.

Kiskadden v. DEP: One of the most eagerly-anticipated rulings in this area was the Environmental Hearing Board’s June 12, 2015 adjudication in Kiskadden v. Department of Environmental Protection, 2015 WL 3798582. In Kiskadden, a resident of Washington County contended that Range Resources’ drilling activities on a nearby well pad caused groundwater contamination impacting his private well (including elevated concentrations of iron, manganese and methane). Kiskadden asked DEP for an alternative water supply; when DEP refused, concluding that Range Resources’ drilling had not caused the complained-of contamination, Kiskadden appealed that determination to the EHB.

After prolonged and contentious proceedings, and a lengthy evidentiary hearing – with the EHB considering the issue de novo, as it is required to – the EHB agreed with DEP’s determination, finding “that the Appellant has not met his burden of proving by a preponderance of the evidence that his water well was impacted by gas drilling operations conducted by Range Resources. Although the Appellant presented extensive evidence of leaks and spills that occurred at Range’s site, some of which were not reported to the Department of Environmental Protection

33 in a timely manner, he did not demonstrate by a preponderance of the evidence that a hydrogeological connection exists between his water well and the Range site.” 2015 WL 3798582, at *1.

Ely v. Cabot Oil & Gas Corp.: The production company also enjoyed a largely- favorable outcome in another well-publicized dispute, from the opposite corner of the Commonwealth. On January 12, 2015, the court in Ely v. Cabot Oil & Gas Corporation, 2015 WL 140033 (M.D. Pa.), adopting 2014 WL 7508091 (M.D. Pa. Apr. 21, 2014), entered partial summary judgment against the remaining ten plaintiffs (out of the original 44), who alleged that drilling operations caused methane and other contamination in their private wells. The court rejected their breach of contract claim and claim for lost royalties, their claim under the Pennsylvania Hazardous Substances Cleanup Act, their fraudulent inducement claim, their claim for medical monitoring, their negligence per se claim, and their claims for bodily injury.

The court did, however, permit the “far narrower” private nuisance and negligence claims for property damage to go forward to trial; even though the supporting evidence was “somewhat limited,” it was minimally sufficient to survive a motion for summary judgment. 2014 WL 7508091, at *2.

An attempted interlocutory appeal was unsuccessful, see Hubert v. Cabot Oil & Gas Corp., No. 15-1439 (3d Cir. May 14, 2015), and the matter is headed toward a trial on those few issues that remain.

Russell v Chesapeake Appalachia LLC: The predominant issue in any case alleging environmental contamination from oil and gas operations is causation: did the challenged operations in fact cause the complained-of injuries? Because this issue is so often outcome-determinative – and because it is an issue that should be supported in fact before the allegation is made in the first place, see Fed. R. Civ. P. 11(b)(3); Pa. R. Civ. P. 1023.1(c)(3) – a key tool for defending these cases is the so-called Lone Pine order, which requires a plaintiff to come forward with evidence of causation at the outset of the case.

Because Lone Pine orders impose a substantial initial burden on plaintiffs, before full discovery effectively commences, they have proven to be quite controversial, and some courts have become increasingly hesitant to impose them. On March 2, 2015, Judge Brann of the United States District Court for the Middle District of Pennsylvania denied, without prejudice, the defendant’s motion for a Lone Pine order in Russell v. Chesapeake Appalachia, LLC, 305 F.R.D. 78. The Russell plaintiffs, residents of Bradford County, alleged that noise, traffic, lights and other aspects of Defendants’ oil and gas operations constituted a nuisance, negligence and negligence per se.

A Lone Pine order, the court held, was unwarranted at such an early juncture. The court opined that a Lone Pine order “should issue only in an exceptional case and after the defendant has made a showing of significant evidence calling into

34 question plaintiffs’ ability to bring forward” evidence of causation.” Id. at 84 (internal quotation omitted). Judge Brann’s ruling anticipated the Colorado Supreme Court’s similar decision the next month, which held that the Colorado civil rules did not permit pre-discovery Lone Pine orders. See Antero Resources Corp. v. Strudley, 347 P.3d 149 (Colo. 2015).

Although Judge Brann explicitly invited another Lone Pine motion following more discovery, his ruling, coupled with the decision from Colorado, may dissuade judges from requiring plaintiffs to come forward, at the outset of the case, with facts demonstrating that their initial allegations have evidentiary support. This may have the effect of prolonging and complicating litigation that would otherwise fail on its merits at the outset of the case.

C. Trade Secret Protection for Fracturing Fluid Composition

Well service companies jealously guard the composition of their fracturing fluids, and zealously seek to prevent wide public disclosure of their proprietary formulas. These efforts – although generally upheld – have not been unqualifiedly successful, and recent decisions reveal avenues through which disclosure may be required.

Robinson Township v. Commonwealth – again: One of the centerpieces of Act 13 was a provision balancing trade secret protection for fracturing fluids against public health needs. That provision, 58 Pa.C.S. § 3222.1(b)(11), allows health professionals to obtain “the specific identity and amount” of chemicals if “necessary for emergency treatment” in a “medical emergency,” but also prohibits health professionals from using this information “for purposes other than the health needs asserted,” and requires health professionals to “maintain the information as confidential.”

This provision came under immediate challenge on a variety of fronts. One of the original litigants in the Robinson Township case was a physician, Dr. Khan, who contended that Act 13’s restrictions on obtaining and sharing information with other physicians impeded his ability to diagnose and treat his patients properly. The Commonwealth Court ruled that Dr. Khan lacked standing to assert these claims until he actually requested confidential information and that information either was not supplied at all or was supplied with restrictions interfering with his ability to provide proper medical care to his patients. Robinson Twp. v. Commw., 56 A.3d 463, 477-78 (Pa. Commw. Ct. 2012). The Supreme Court reversed this decision, holding that Dr. Khan did have standing. See Robinson Twp. v. Commw., 83 A.3d 901, 923-25 (Pa. 2013).

On remand, the Commonwealth Court ruled against Dr. Khan on the merits, rejecting the contention that these provisions were an invalid special law or violated the “single subject rule.” See Robinson Twp. v. Commw., 96 A.3d 1104, 1115-19 (Pa. Commw. Ct. 2014). Even so, the industry’s victory was a qualified one: in dismissing Dr. Khan’s complaints, the Commonwealth Court observed

35 that “[n]othing” in the statute’s confidentiality provisions “precludes a physician from including the information in patient records, medical treatment or evaluations, including evaluations based on trade secrets that physicians are required to keep,” or “precludes a physician from sharing with other medical providers any trade secrets that are necessary for the diagnosis or treatment of an individual.” Id. at 1117.

It remains to be seen whether this is a straightforward recognition that even proprietary information may be disclosed as necessary, under suitable protections, or whether this is the “camel’s nose under the tent,” a harbinger of unrestricted disclosure of proprietary industry information.

Rodriguez v. Secretary: Another physician’s effort to challenge these restrictions also failed, although again, it is not a complete victory for the oil and gas industry. Dr. Alfonso Rodriguez challenged the statute in federal court, claiming that it violated his First Amendment rights right to share information with his patients and the medical community. The United States District Court for the Middle District of Pennsylvania dismissed Dr. Rodriguez’s claims, holding that he lacked standing, in that he had not alleged that he had been in any situations where he needed or attempted to obtain confidential information, that his communications had been constrained, or that he had been compelled to enter into a confidentiality agreement. See Rodriguez v. Krancer, 984 F. Supp. 2d 356 (M.D. Pa. 2013); Rodriguez v. Abruzzo, 29 F. Supp. 3d 480 (M.D. Pa. 2014). The Third Circuit agreed. In so doing, it declined to rely on the Pennsylvania Supreme Court’s contrary holding in Robinson Township, observing that the standing requirement in state court is less stringent than standing in federal court under Article III’s “case or controversy” requirement. Rodriguez v. Secretary, 604 Fed. App’x 113 (3d Cir. 2015).

Haney v. Range Resources – Appalachia, LLC: Indeed, it appears that many courts freely require the disclosure of proprietary information on fracturing chemicals in discovery in civil litigation. For example, in Haney v. Range Resources – Appalachia, LLC, the plaintiffs alleged bodily injury and property damage caused by air and groundwater contamination, allegedly resulting from drilling activities. In discovery, they sought information regarding chemicals used at the drill site. After an order directed at the non-party manufacturers of these products failed to generate responses, the plaintiffs sought to compel Range Resources to gather and provide the information. The Washington County Court of Common Pleas granted the requested order.

Although Range Resources attempted to appeal, the Superior Court ruled, in a non-precedential April 14, 2015 decision, that it lacked jurisdiction. Range Resources had attempted to characterize the order as an appealable “collateral order,” but the Court disagreed, holding that the issue was not “too important to be denied review.” 2015 WL 1812842.

36 Kiskadden v. DEP: The ruling in Haney is reminiscent of an earlier ruling from the Environmental Hearing Board in a related appeal, Kiskadden v. DEP (whose final adjudication is discussed above, see supra § VI.B), resolving a long-running discovery dispute between Range Resources and Kiskadden over the contents of proprietary fracturing fluids. Range Resources initially declined to produce certain proprietary information concerning chemicals used at the drill site at issue. Ultimately, the EHB required Range Resources to provide the information; a number of manufacturers refused to provide the information to Range Resources, however. In response, the appellant filed a motion seeking to hold Range Resources in contempt. The EHB declined to grant appellants an adverse inference, but did shift the burden of proof, creating a “rebuttable presumption that contaminants present in the [a]ppellant’s water supply may have been used by Range at the . . . site and/or in Range’s operations.͇ See Kiskadden v. DEP, 2014 WL 2747482 (Pa. Envt’l Hearing Bd. June 10, 2014).

In sum, while Pennsylvania law protects proprietary commercial information regarding the composition of drilling and fracturing chemicals, via (among other things) a statutory provision that has to date withstood challenge, that protection remains qualified and incomplete in litigation. To date, objections to producing this information based on confidentiality concerns have not been successful at outweighing adjudicative bodies’ ordinary preference for complete discovery of arguably relevant information. Further, the confidentiality protections built by Act 13 are arguably somewhat porous, in light of the Commonwealth Court’s ruling in Robinson Township. In consequence, participants in the oil and gas industry who wish to protect their confidential commercial information may wish to be doubly cautious in availing themselves of more typical mechanisms (such as protective orders limiting disclosure).

37 Recent Developments and Current Issues in Pennsylvania Oil and Gas Litigation – 2014-15

Paul K. Stockman

www.mcguirewoods.com

What’s New and Trending…

ƒ The big picture…

ƒ Equitable tolling of leases

ƒ “Tax Washing”

ƒ The aftereffects of Robinson Township

ƒ Citizen challenges to midstream project development

ƒ And more…

McGuireWoods | 2

1 The Big Picture…

ƒ The Pennsylvania Supreme Court continues to “go it alone.” • Pennsylvania precedent still tends to trump “majority rule.” ƒ Plain meaning still rules. • Lease language > creative lessor arguments. ƒ Lease and title disputes still matter, even in a low-price environment. • The pipeline is still full… ƒ Robinson Township might not turn out to be a big deal. • Plus ça change, plus c’est la même chose. ƒ But that’s not stopping anyone… • There’s been no slow-down in citizen challenges.

McGuireWoods | 3

Harrison v. Cabot Oil & Gas 110 A.3d 178 (Pa. 2015).

ƒ The upshot: lessors’ challenges to lease validity do not toll the primary term. ƒ Lessor challenged the lease, alleging fraudulent inducement; Cabot counterclaimed, seeking a declaration that primary term was tolled during the pendency of the dispute. ƒ The M.D. Pa. upheld the lease, but declined to toll the lease term. ƒ The Supreme Court, on certification from the Third Circuit, agreed. • The mere filing of a dec action is not per se anticipatory repudiation. – But other, more affirmative acts may be sufficient. – E.g., would barring access to the property be an anticipatory repudiation? • The Court focused on the fact that the lessee could have included an express provision tolling the lease term. • Note: the Court disregarded decisions from other jurisdictions.

McGuireWoods | 4

2 Harrison v. Cabot Oil & Gas, cont’d

ƒ The take-aways: • Include an express tolling provision in the lease, and/or a covenant that lessor will not cause or create an encumbrance or cloud on title. • Consider demanding adequate assurance of future performance – The Court did not address this doctrine, so it may or may not work. • Consider steps to expedite lease litigation. • Consider early dispositive motions. – Especially if you’re in federal court, where they’re not as disfavored. • Consider taking steps to begin operations, so as to continue the lease into the secondary term. – Fairly modest steps, if taken in good faith, have been held to extend a lease into the secondary term (e.g., staking well locations, unloading timber, permitting activities, grading of access road, etc.)

McGuireWoods | 5

Herder Spring Hunting Club v. Keller 93 A.3d 465 (Pa. Super Ct. 2014), alloc. granted, 108 A.3d 1279 (Pa. 2015) ƒ The Supreme Court will decide whether historical (pre-1962) tax sales of “unseated” (i.e., undeveloped) land can convey previously-severed oil and gas estates. ƒ The backdrop: • An 1806 statute required those “becoming a holder of unseated lands” to report them for assessment. • Taxes against unseated property were deemed to be assessed against the property itself in rem. • Historically, landowners would take advantage of this to try to “wash” their title, defaulting on taxes and buying the property back at tax sale in order to eliminate clouds on the title. • Because taxes were deemed to be owed by the property itself, there was no effort to provide individual notice to interested owners.

McGuireWoods | 6

3 Herder Spring Hunting Club v. Keller, cont’d ƒ The Herder Spring case: • The Kellers sold property in 1899, reserving subsurface rights. • The record did not show that they reported the severed subsurface rights for taxation. – Note: at the time, oil and gas was not taxable unless it could be valued by reference to production in the area. • In 1935, Centre County obtained the property at tax sale and sold it to Herder Spring’s predecessor-in-title. • The Court of Common Pleas held that the reserved oil and gas estate could not be taxed, and thus could not have been sold at the tax sale. ƒ The Superior Court disagreed.

McGuireWoods | 7

Herder Spring Hunting Club v. Keller, cont’d

ƒ The Superior Court’s ruling: • The entire property was included in the assessment, including the subsurface, unless the owners of the severed subsurface could prove that it was separately reported. • The tax sale thus conveyed the entire property, including the severed subsurface estate (even though that subsurface estate could not legally be taxed). • The court recognized the apparent injustice, but held its nose: “We are aware that our resolution of this matter is at odds with modern legal concepts” and “may be seen as unduly harsh,” but “[w]e do not believe it proper to reach back, more than three score years, to apply a modern sensibility and thereby undo that which was legally done.” 93 A.3d at 473

McGuireWoods | 8

4 Herder Spring Hunting Club v. Keller, cont’d

ƒ The Supreme Court has accepted review. The principal questions: • How should the 1806 statute be construed? – It requires action by those “becoming a holder of unseated lands.” – Does someone retaining a reserved interest “become” a holder? ƒ Should the holder of a reservation be penalized because its successor-in-title failed to report its interest, or mis-reported the limited nature of its interest? – Would subsurface oil and gas have been considered “lands” in 1806? – Note that the Court directed that tax statutes are to be construed strictly. • Do in rem tax sales without any effort at individual notice to property owners violate due process? “An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950).

McGuireWoods | 9

Herder Spring Hunting Club v. Keller, cont’d

ƒ Briefing is complete and the parties are awaiting an argument date. ƒ The take-aways: • Don’t assume that a title search going back only a few decades will disclose all potentially-interested parties or potential adverse claims. – Many of these potentially-questionable sales took place in the late 19th or early 20th centuries. • Assume that any oil and gas interest flowing from a treasurer’s deed may be subject to attack. – Even if the Supreme Court affirms Herder Spring, it may just shift the terrain of battle to issues involving the conduct of the tax sale.

McGuireWoods | 10

5 The aftermath of Robinson Township 83 A.3d 901 (Pa. 2013)

ƒ Robinson Township struck down Act 13’s state-wide land use provisions. ƒ But the plurality did not stop there. To recap, it held: • The Pennsylvania Constitution’s Environmental Rights Amendment (Article I, Section 27) “requires each branch of government to consider in advance of proceeding the environmental effect of any proposed action.” 83 A.3d at 952. • The General Assembly, despite having the right to enumerate municipal powers, “has no authority to remove a political subdivision’s implicitly necessary authority to carry into effect its constitutional duties.” Id. at 977. • The Amendment is self-executing, creating “a constitutional right personal to each citizen” and that is judicially enforceable. Id. at 951 n.39; see also id. at 952-53, 974.

McGuireWoods | 11

The aftermath of Robinson Township, cont’d

ƒ The plurality opinion also reflected a deep-seated hostility toward shale gas development: “By any responsible account, the exploitation of the Marcellus Shale Formation will produce a detrimental effect on the environment, the people, their children, and future generations, and potentially on the public purse, potentially rivaling the environmental effects of coal extraction.” 83 A.3d at 976. (Tellingly, the plurality made these findings on a record consisting only of affidavits from Act 13’s critics.) ƒ What would this mean?

McGuireWoods | 12

6 The aftermath of Robinson Township, cont’d

ƒ The Commonwealth Court’s opinion on remand: • The court upheld 58 Pa.C.S. § 3302, precluding municipalities from regulating areas already covered by the Oil and Gas Act. 96 A.3d 1104, 1120 (2014). – This reaffirms Range Resources – Appalachia v. Salem Township, 964 A.2d 569 (Pa. 2009). • The court upheld provisions requiring DEP to provide notice of spills to public, but not private, water supplies, and allowing health care professionals to obtain information about the chemical composition of fracturing fluids while still protecting its proprietary character. 96 A.3d at 1111-19. • The court held that 58 Pa.C.S. §§ 3305-3308, allowing the PaPUC to review local ordinances, were not severable from the invalid portions of Act 13, and thus were invalid. Id. at 1120-22. – PaPUC has asked the Supreme Court to review and reverse this holding.

McGuireWoods | 13

The aftermath of Robinson Township, cont’d

ƒ Pennsylvania Environmental Defense Fund v. Commonwealth, 1 108 A.3d 140 (2015): • PEDF challenged the allocation of public oil and gas revenues, arguing that Article I, Section 27 required that those funds be spent only for environmental protection or resource conservation. • The Commonwealth Court disagreed. • The court buried its blockbuster holding in a footnote: The Robinson Township plurality is not binding, and is persuasive “only to the extent it is consistent with binding precedent from this Court and the Supreme Court on the same subject.” Id. at 156 n.37. • The court continued to apply the three-part test from Payne v. Kassab, 312 A.2d 86 (Pa. Commw. Ct. 1973). ƒ Other courts, and the Environmental Hearing Board, are in accord.

McGuireWoods | 14

7 The aftermath of Robinson Township, cont’d

ƒ Unanswered questions… • Is local zoning now “constitutionalized”? – The plurality plus Justice Baer’s concurrence together suggest “yes.” • Is there a “constitutional tort” claim available to challenge any governmental act? – The Commonwealth Court seemed to assume as much in Feudale v. Aqua Pennsylvania, although it rejected the claim on the merits. 2015 WL 4461069 (Pa. Commw. Ct. July 22, 2015). – Even under Payne v. Kassab, there’s a lot of room for argument. • Can the right to challenge governmental inaction allow litigation that would seek to preclude purely private activities? • Does Article I, Section 27 require pre-development “environmental impact assessments” as a matter of constitutional law?

McGuireWoods | 15

The aftermath of Robinson Township, cont’d

ƒ What’s next… • Citizen groups still treat Robinson Township as “a case for all seasons.” • As a result, the Supreme Court at some point will need to wade back into this dispute. • In that event, would a majority of the Court speak so broadly? – Note that two of the members of the Robinson Township plurality are no longer on the Court (former Chief Justice Castille and former Justice McCaffery).

McGuireWoods | 16

8 The aftermath of Robinson Township, cont’d

ƒ The take-aways… • For now, Robinson Township’s effect has been dampened by the ruling in PEDF. • Even so, do not overlook the potential for citizen group challenges, and stay attuned to the developing case law in this area. • Because land use decisions are once again made on a local basis, be prepared to engage with municipal zoning boards. • At the same time, because Oil and Gas Act standards still trump local rules, also be prepared to launch challenges if municipalities overreach.

McGuireWoods | 17

The Next Battleground: Midstream…

ƒ Citizen groups have shifted their strategy from attempting to preclude or limit drilling toward attempting to prevent oil and gas from getting to end-users. ƒ New pipeline proposals face widespread opposition, and challenges upon a number of regulatory fronts. • Challenges to emission permits before PaDEP and the EHB. • Challenges to eminent domain and pipeline companies’ status as “public utilities.” • Challenges in FERC certification proceedings. • Local land use challenges. • Etc.

McGuireWoods | 18

9 The Next Battleground: Midstream, cont’d

ƒ Source aggregation: • Citizen groups have been challenging air emission permits, contending that multiple facilities should be deemed a single emission “source.” • This would require more complicated and costly “new source review” and “major source” permitting. • The regulations require grouping of sources located on “contiguous or adjacent” properties. • It is argued that this requires grouping of sources that are “functionally interrelated.”

McGuireWoods | 19

The Next Battleground: Midstream, cont’d

ƒ Source aggregation: • To date, citizen groups’ efforts to aggregate multiple facilities have not been successful. • E.g., in Citizens for Pennsylvania’s Future v. Ultra Resources, the court held that eight compressor stations “should not be ‘daisy- chained’ together to establish a contiguous grouping,” where they were “not connected” and “operate independently of one another,” with “no discernable relationship” between the individual stations. 2015 WL 769757 (M.D. Pa. Feb. 23, 2015). • But the court in PennFuture v. Ultra would not categorically rule out “functional interrelatedness” as a basis for aggregating multiple sources. • And the EHB has opined that it is a fact-specific determination. National Fuel Gas Midstream v. PaDEP, 2014 WL 6537086 (Oct. 31, 2014).

McGuireWoods | 20

10 The Next Battleground: Midstream, cont’d

ƒ Challenges to pipelines’ status as “public utilities”: • Citizen groups and landowners are also challenging pipeline companies ability to exercise rights given to “public utilities.” • E.g., in Sunoco Pipeline v. Loker, a York County court held that Sunoco was not a “public utility” with the right of eminent domain (because it was regulated by FERC as a “common carrier”). No. 2014-SU-4518-05 (C.C.P. York C’ty Feb. 24, 2014). • E.g., two PaPUC administrative law judges ruled that Sunoco was not a “public utility” within the meaning of the Municipalities Planning Code, and thus was not exempt from municipal zoning. Petition of Sunoco Pipeline, L.P., No. P-2014-241194 – The full PUC disagreed, by a 4-1 margin. – Before the issue could be resolved definitively, Sunoco reached agreements with the affected municipalities and withdrew its petitions. • So… the issue remains unsettled.

McGuireWoods | 21

The Next Battleground: Midstream, cont’d

ƒ Quaere what effect the Wolf administration’s newly-appointed “pipeline task force” will have?

McGuireWoods | 22

11 But wait, there’s more… ƒ Lease disputes: Pennsylvania courts continue to give language its plain meaning, rejecting creative lessor arguments.

• Shedden v. Anadarko E. & P. Co., 88 A.3d 228 (Pa. Super. Ct. 2014). – While largely about “estoppel by deed,” the Superior Court also relied on the lease’s “Mother Hubbard” clause to hold that after-acquired property is subject to lease. – Supreme Court accepted appeal; to be argued in November. • Warren v. Equitable Gas Co. and Mason v. Range Resources, No 697 WDA 2014 (Pa. Super. Ct. Feb. 4, 2015); 2015 WL 4531299 (W.D. Pa. July 27, 2015). – Under “dual purpose” (production and storage) leases, use of the property for storage holds the lease in effect for all purposes. – The production and storage aspects of the habendum clause are not severable.

• Danko Holdings v. EXCO Resources, 57 F. Supp. 2d 389 (M.D. Pa 2014) – Change in ownership clauses are enforceable.

McGuireWoods | 23

But wait, there’s more… ƒ Pooling issues and missing or non-consenting owners: Pennsylvania law remains unclear. • How does compulsory unitization under the Oil and Gas Conservation Law work? See 58 P.S. §§ 401 et seq. – This is potentially applicable to the Utica Shale, but not the Marcellus. – Hilcorp Energy has withdrawn its efforts to create well spacing and drilling units in Mercer County. • How are trusts in favor of absent owners created under the Dormant Oil and Gas Act? See 58 P.S. §§ 701.1 et seq. – Chesapeake’s efforts to create such a trust have so far proven fruitless. See In re Hill, No. 1125 MDA 2013 (Pa. Super. Ct. Apr. 21, 2014 & May 22, 2014). • Is the recent amendment to the Oil and Gas Lease Act, permitting unitization in the absence of expressly preclusive lease language, valid? See 58 P.S. § 34.1. – One trial court says “yes,” but the litigation remains pending. See EQT Prod. Co. v. Opatkiewicz, No. GD-13-13489 (C.C.P. Allegheny C’ty July 22, 2013). McGuireWoods | 24

12 But wait, there’s more… ƒ Enforcement – civil and even criminal – remains a priority. • Exhibit A: the June 2015 $8.9 million civil penalty against Range Resources. • Exhibit B: the ongoing criminal charges against XTO.

ƒ Contamination claims remain hard for landowners to prove.. • E.g., in Kiskadden v. DEP, the EHB found that drilling did not cause contamination in the appellant’s private well. 2015 WL 3798582 (June 12, 2015) • But it still is difficult to make these cases go away quickly. See, e.g., Russell v. Chesapeake Appalachia, 305 F.R.D. 78 (M.D. Pa. 2015) (declining to enter Lone Pine order). ƒ Restrictions on health care workers’ ability to disclose proprietary fracturing fluid formulas have survived challenge. See Rodriguez v. Secretary, 604 Fed. App’x 113 (3d Cir. 2015); Robinson Twp. v. Commonwealth, 96 A.3d 1104, 1115-19 (Pa. Commw. Ct. 2014). • But disclosure still has been compelled in civil proceedings. See Haney v. Range Resources, 2015 WL 1812842; Kiskadden v. PaDEP, 2014 WL 2747482 (EHB June 10, 2014).

McGuireWoods | 25

Questions or Comments?

Paul Stockman [email protected] 412-667-7945

www.mcguirewoods.com

McGuireWoods | 26

13 DAVID DUANE FREUDENTHAL SENIOR COUNSEL

CHEYENNE [email protected] Phone: 307.996.1401 Fax: 307.996.1419 1604 Pioneer Avenue Cheyenne, WY 82001- 4414

Dave Freudenthal, a Wyoming native, served two terms as Wyoming's 31st governor. In PRACTICES 2002, Freudenthal, a Democrat and first-time candidate, won an upset victory in one of America's most overwhelmingly Republican states. After his first term, he was re-elected • Regulatory & Policy in 2006 by the greatest percentage in the State's history. By the end of his tenure, • Environment & Natural Wyoming was ranked as the "Best Run State in America" by 24/7 Wall St., based on a Resources review of hundreds of data sets and a variety of metrics ranging from debt rating agency • Energy reports to median income. When he stepped down in 2011, his approval rating was over • Endangered Species & Wildlife Protection 80% ---at the top among all U.S. governors – and he left his successor with a balanced • Hazardous Materials budget and a billion dollar surplus. (HazMat) Transportation • Hydraulic Fracturing Freudenthal's eight years were marked by a constructive bi-partisan relationship with a • Climate Change Republican dominated legislature. This working relationship moved Wyoming forward • Clean Water Act on many fronts. As the nation's least populous state, Wyoming maintains a resource- • Mining based economy, relying primarily on mineral and energy extraction, tourism and • Federal Lands agriculture for its economic livelihood. Recognizing the strengths and opportunities that • NEPA & Historic this economic base represented for the state, Freudenthal's administration focused on Preservation balancing resource extraction and preservation with regulatory approaches designed to enhance long-term growth.

Wyoming was the first state to adopt meaningful regulation of hydraulic fracturing. It is also the leader in establishing a legal framework for carbon capture and sequestration. The State remains a leader in the funding of research and demonstration in this area. At the same time, under Freudenthal, significant effort was devoted to the Wyoming Pipeline Authority and the Wyoming Infrastructure Authority whose missions are to increase the pipeline capacity and electric transmission infrastructure to move Wyoming's energy to national markets. Wyoming's natural gas pipeline capacity was doubled during Freudenthal's term of office. Freudenthal's leadership on natural resource development issues led to his service as Chairman of the Western Governors Association and Chairman of the Interstate Oil and Gas Compact Commission.

Dave Freudenthal

1 Freudenthal's approach to resource growth and management gave rise to a constructive tension with the federal government. Whether in a court of law or the court of public opinion, Freudenthal pushed back hard against the increasingly activist federal regulatory and land management agencies. On the other hand, where federal actions were appropriate to protect Wyoming's interests, he worked with representatives of the U.S., supporting, for example, federal legislation to protect the Wyoming Range in the northwestern portion of the state.

Freudenthal's administration also strove to ensure Wyoming's long-term future by focusing on education, community- building and resource preservation. Governor Freudenthal spearheaded legislation and funding for economic and community development initiatives, the funding of the Cultural Trust Fund for the arts, creation of the Wildlife and Natural Resources Trust Fund, and establishment of the School of Energy Resources at the University of Wyoming. Public education, long a priority in Wyoming, received unprecedented support including the creation of the "Hathaway Scholarship Fund" to provide assistance to nearly every Wyoming high school graduate seeking higher education in the State. This fully endowed, constitutionally protected trust will provide education assistance to Wyoming citizens for generations. Freudenthal advanced all these efforts and removed the sales tax on food, while maintaining significant budget surpluses throughout his terms.

Freudenthal was born and raised in Wyoming. He graduated from Amherst College in 1973 and returned to Wyoming to take a position as an economist with the State. Governor Ed Herschler appointed him State Planning Coordinator in 1975. After graduating from the University of Wyoming College of Law in 1980, Freudenthal opened his own one-person law firm in Cheyenne. The firm grew into a general practice firm representing individuals and business. In 1994, he was appointed U.S. Attorney for the District of Wyoming. Dave and his wife, Nancy, have four children and live in Cheyenne, Wyoming.

Government Experience

• U.S. Attorney's Office-District of Wyoming: U.S. Attorney (1994-2001) • State Government: Wyoming-Governor of Wyoming (2003-2011); Wyoming State Planning Director

Admissions/Affiliations

Admitted to practice: Wyoming

Education

• University of Wyoming College of Law, J.D. • Amherst College

Speaking Engagements

• "Range-Wide Conservation Strategies," Endangered Species Act Conservation & Litigation: CLE International 2nd Annual Conference, Austin, TX (June 5, 2014). Presenters: Dave Freudenthal and Ryan M. Lance.

Dave Freudenthal

2 • "Accelerating Deployment to Meet New CO2 Emission Reduction Mandates," The Thirteenth Annual Carbon Capture, Utilization & Storage Conference, Pittsburgh, PA (April 28-May 1, 2014). Keynote Speaker: Dave Freudenthal. • "Martz Winter Symposium: Natural Resource Industries and the Sustainability Challenge," University of Colorado Law School (February 27-28, 2014). Speaker: Dave Freudenthal. • "Energy - What the Future Holds," The 2011 Tenth Circuit Judicial Conference (September 22, 2011). Panelist and Speaker: Dave Freudenthal. • "The Good, the Bad, and the Not So Pretty: Public Policy Leaders and the Evolution of Technology," Gould Distinguished Lecture on Technology and The Quality of Life, University of Utah (September 14, 2011). Speaker: Dave Freudenthal.

Publications

• "Who Flips The Switch?" Law360 (February 19, 2015). Co-Authors: Patricia M. Alexander, Larry F. Eisenstat, Dave Freudenthal, and Nancy Saracino. • "Regulatory Forecast 2015: What Corporate Counsel Need to Know for the Coming Year," a Crowell & Moring LLP publication (January 2015). Contributors.

Press Releases

• Crowell & Moring Partners Kyle W. Parker and Former Governor David Freudenthal Featured in National Law Journal's Energy and Environment Trailblazers & Pioneers (Apr.30.2015) • Crowell & Moring Releases Third Annual Litigation Forecast Report and Inaugural Regulatory Forecast (Jan.13.2015) • Former Wyoming Governor Dave Freudenthal Receives Cornerstone Award from Basin Electric Power Cooperative (Nov.28.2011) • Crowell & Moring Senior Counsel and Former Wyoming Governor David Freudenthal Honored with Partners in Conservation Award (Sep.22.2011) • Former Wyoming Governor David Freudenthal Joins Crowell & Moring's Environment & Natural Resources Group (Jun.28.2011)

Dave Freudenthal

3

Matt Curry, Director of Business Development, Range Resources

Matt joined Range Resources in June 2008 and is currently the Director of Business Development of Range Resources – Appalachia. A native Pennsylvanian, Matt had worked predominantly in North Texas before returning home to the Pittsburgh area 15 years later.

Matt entered the natural gas industry on the service side with Schlumberger and had the good fortune to join Mitchell Energy in 1997 just as the company embarked on the first successful development of a shale play, the Barnett Shale. His experience includes a venture in consulting in which he staked, drilled, completed, and produced Barnett wells as well as installed pipeline, compression, and treatment facilities. Prior to joining Range Resources, Matt last held the position of Strategic Planner for EnCana’s Mid-Continent Business Unit in Dallas, TX, which had operations in the Barnett Shale, Deep Bossier, and Haynesville Shale among other natural gas plays in Texas and Louisiana.

Prior to his current role, Matt had been responsible for building and managing multi-disciplinary development teams which direct the development of Range’s Marcellus Shale asset, development which comprises the majority of Range Resources Corporation’s total capital budget.

Matt received his bachelor’s degree in Chemical Engineering from Penn State and an MBA from Southern Methodist University.

Kurt Krieger Member, Steptoe & Johnson PLLC

Kurt Krieger focuses his practice in the areas of utility regulation and energy law. He represents and counsels regulated gas and electric utility companies, regulated and unregulated natural gas pipelines and midstream companies, natural gas producing companies, and power generation developers with respect to both state and commonwealth public service (or utility) commission and Federal Energy Regulatory Commission (FERC) matters.

His experience includes: drafting and negotiating commercial agreements pertaining to energy-related transactions; counseling and representing companies in tariff, rate (or rate-making), economic, safety, facility siting or expansion (certificate-related) issues and proceedings; integrating alternative energy providers into existing utility systems; representing parties in enforcement proceedings before the FERC; and developing and presenting training on regulatory matters to company employees. As a former inhouse counsel, he developed, implemented, and managed a FERC and regulatory compliance program for interstate natural gas pipeline companies and gas and electric utilities, and has counseled extensively on related standards of conduct and code of conduct issues.

Mr. Krieger received his J.D. from West Virginia University College of Law where he was the Executive Editor of the West Virginia Law Review. He has a degree in Accounting from Wheeling Jesuit University.

Kurt Krieger Steptoe & Johnson PLLC P.O. Box 1588, Charleston, WV 25326-1588 Overnight: Chase Tower, 8th Floor, 707 Virginia Street, East, Charleston, WV 25301 O: 304-353-8124 F: 304-353-8180 C: 304-541-1529 [email protected] www.steptoe-johnson.com

6912584 -

The Federal Energy Regulatory Commission: A Very Brief Introduction to Regulation of the Application and Approval Process for Interstate Natural Gas Pipeline Construction

By

©Kurt L. Krieger Steptoe & Johnson PLLC [email protected] 304-353-8124

I. The Federal Energy Regulatory Commission

Few outside of the energy industry recognize the name of the Federal Energy Regulatory

Commission (“FERC”) and its significant role in regulating several important energy segments.

The FERC is an independent agency under the United States Department of Energy located in

Washington, D.C., that regulates the interstate transmission of electricity, natural gas, and oil.

FERC’s (and predecessor Federal Power Commission’s) roots are in the Federal Power Act of

19351 and Natural Gas Act of 1938 (“NGA”)2 -- the later being an act of Congress that defines

FERC’s jurisdiction over the transportation and/or sale for resale of natural gas in interstate commerce, but excludes the local distribution of gas, gathering and production. The FERC also reviews proposals to build or abandon liquefied natural gas (“LNG”) import/export terminals and certain hydropower projects. Unlike its role and jurisdiction over the electric and oil segments,

FERC has the exclusive jurisdiction and authority to review and approve the siting and construction of interstate natural gas pipelines; a summary of which is the primary purpose of this brief article.

1 16 U.S.C. §§ 791, et seq.

2 15 U.S.C. §§ 717, et seq.

1 6964319 -

FERC is composed of five commissioners who are appointed by the President with the

advice and consent of the United States Senate. Commissioners serve five-year terms and have

an equal vote. No more than three commissioners may belong to the same political party. The

President’s appointments are an important factor in the shaping and administration of national

energy policy. FERC’s decisions are not subject to review by the President or Congress, but

rather by the United States Courts of Appeals.

FERC has broad enforcement and penalty/disgorgement authority, and the penalties for

non-compliance with FERC’s rules and regulations have substantially increased since and

because of Enron. The Energy Policy Act of 2005 (“EPAct 2005”)3 increased FERC’s civil penalty authority from a few thousand dollars per day to $1,000,000 per day, per violation for any violation of the NGA and other federal statutes that FERC administers.

II. The Scope of FERC Regulation

The FERC is active in both the big picture, high visibility areas of energy regulation, and in technical and narrowly focused areas. The FERC:

• regulates the transmission and wholesale sale of natural gas for interstate commerce;

• approves the siting and abandonment of interstate natural gas pipelines and storage facilities;

• oversees environmental matters related to interstate natural gas pipeline and hydroelectric projects and other matters;

• regulates the transmission and wholesale sale of electricity in interstate commerce;

• reviews certain mergers and acquisitions and corporate transactions by electric companies;

• regulates the transportation of oil by pipeline in interstate commerce;

3 Pub. L. No. 109-58, 119 Stat. 594 (2005).

2 6964319 -

• approves the siting of electric transmission projects under very limited circumstances;

• ensures the safe operation and reliability of proposed and operating LNG import/export terminals;

• licenses and inspects private, municipal and state hydroelectric projects;

• protects the reliability of the high-voltage interstate transmission system through mandatory reliability standards;

• monitors and investigates energy markets;

• enforces its regulatory requirements through imposition of civil penalties and other means; and

• administers accounting and financial reporting regulations and the conduct of regulated companies.

While the list above is extensive and broad in scope, there are many aspects of the energy industry that are not FERC regulated. FERC is not involved in the:

• regulation of retail electricity and natural gas sales to consumers;

• approval of the physical construction of electric generation facilities;

• regulation of activities of the municipal power systems, federal power marketing agencies like the Tennessee Valley Authority and most rural electric cooperatives;

• regulation of nuclear power plants;

• oversight for the construction of oil pipelines;

• abandonment of service as related to oil facilities;

• mergers and acquisitions as related to natural gas and oil companies;

• responsibility for pipeline safety; and

• reliability problems related to failures of local distribution facilities.

Responsibility for these areas is spread among various other federal and state agencies.

3 6964319 -

III. FERC Regulation of Interstate Natural Gas Pipelines

Interstate natural gas pipelines are comprehensively regulated by the FERC. Each

interstate pipeline must have a FERC-approved “tariff” which contains the pipeline’s approved

services, rates to be charged, and the terms and conditions under which service will be rendered.

The rates charged may be cost-based reflecting the cost of building and operating the

infrastructure necessary to render the service (and paid for by all pipeline customers via rates),

cost-based but incremental (and paid for only by those for whom the expansion project is built

and will benefit most from the additional service), or market-based reflecting market demand for

the service (and paid for by only those customers of the pipeline using the new or additional

service).

Each interstate pipeline applies for and receives a blanket construction/abandonment

certificate from FERC that authorizes the pipeline to construct less complex facility projects

without an extensive advance review process at FERC.4 The construction/abandonment blanket

certificate offers two authorization mechanisms both of which require advance written

notification of construction activity to the landowner similar to but less detailed than that which

is described later in this article for more complex projects. The “automatic” authorization within

the blanket certificate authorizes the pipeline to construct and/or abandon facilities within certain

cost and project purpose limitations without seeking any advance permission from FERC.5 For projects that exceed that cost limit and/or which do not fit the project purpose limitations for the automatic authorization, the second mechanism requires the pipeline company to file a mini- application with the FERC. Like the automatic authorization mechanism, this mechanism has limitations but the cost limits are significantly higher and the purpose limitations much less

4 18 C.F.R. §§157.201-157.216.

5 18 C.F.R. §§157.208(a) and 157.216(a).

4 6964319 - strict. Known as the “prior notice” mechanism, the pipeline receives approval from FERC by silence if no one objects to the project within a certain time period after the FERC issues a notice to the public that the pipeline has filed the mini-application.6

Regardless of which mechanism within a pipeline’s blanket construction/abandonment certificate is used, the pipeline must avoid “segmenting” a project into smaller pieces in order to squeeze the project in under the “per project” cost limits set forth in the blanket certificate project cost regulations. Similarly, the pipeline must take seriously the cost estimating process to insure that any project is, in fact, built under the applicable cost limit. Cost limits are adjusted upward annually.

For projects that do not fit either mechanism within the blanket construction/abandonment certificate, the pipeline must seek a project specific certificate from the FERC under Section 7 of the NGA. That process requires a detailed application covering a variety of topics.7 The application must include a narrative describing the project and contain exhibits covering:

• Corporate structure and related details of the applicant.

• Maps and project facts including location, length and size of pipelines and compressor stations and connections with other entities.

• Environmental information (broadly defined). Preparation of the environmental exhibits will bring the applicant into contact with a variety of major federal laws and programs including the National Environmental Policy Act, National Historic Preservation Act, Clean Water Act, Clean Air Act, Coastal Zone Management Act, Wild and Scenic Rivers Act, National Wilderness Act, National Parks and Recreation Act and more. The required information must be presented to the FERC as part of the application but set forth in 13 separate “Resource Reports” covering:

o detailed project description with photo based alignment sheets, topographic maps, methods to be used for construction and/or

6 18 C.F.R. §§157.205, 157.208(b) and 157.216(b).

7 18 C.F.R. §§157.6-157.22.

5 6964319 -

abandonment activities and a complete listing of all other authorizations required for the project and the status of the pipeline company’s efforts to obtain those authorizations;

o water use and quality;

o fish, wildlife and vegetation;

o cultural and historic resources;

o socioeconomics;

o geological resources;

o soils;

o land use, recreation and aesthetics;

o air and noise quality;

o alternatives to the pipeline company’s siting proposals;

o reliability and safety;

o PCB contamination;

o engineering and design;

o flow diagrams showing a variety of pipeline operational dynamics including pressure, capabilities/capacity under various scenarios, pressure, pipe wall thickness, etc.;

o gas supply data where relevant;

o market data showing commercial support for the project including executed precedent agreements with project customers;

o federal authorizations (other than from the FERC) required for the project;

o cost of the facilities to be constructed;

o financing;

o construction, operation and management agreements;

o revenue (expenses and income);

o depreciation;

6 6964319 -

o tariff (the rates to be charged to project customers) with appropriate support;

o acquisition information (if any facilities are being acquired rather than constructed) including acquisition contracts and accounting entries; and

o abandonment information (if any facilities are being abandoned) including any relevant contracts, flow diagrams showing the impact on the pipeline company’s capabilities after the abandonment, impact on customers served by the facilities to be abandoned, effect on existing tariffs, accounting entries and location of the facilities to be abandoned.

At the time of application filing, the pipeline company must trigger a landowner notification process in which all affected landowners (defined by FERC regulations) and interested government entities receive a formal packet of information, including information about how to become a party in the FERC review process and how to fight or comment on the project if desired. Once filed, the application will be the subject of a “Notice of Application” published by the FERC in the Federal Register.

The landowner notification process is one of several facets of a larger undertaking referred to as “stakeholder outreach” in which the applicant must educate landowners, agencies and public officials about the project and the FERC review process. Outreach is an extremely important and well-organized process. The primary purpose of outreach, in addition to education, is to provide a forum in which as many landowner, environmental, and local government concerns as possible can be resolved by the pipeline working directly with the stakeholders.

All parts of the application are dissected by subject area specialists within the FERC.

The review of the environmental exhibits will divert onto its own track with the FERC staff issuing notices to the public for site visits and scoping meetings held near the project sites to assist the FERC staff in determining the scope of its environmental review process. For proposed interstate natural gas pipeline projects, FERC is the lead agency under the National

7 6964319 -

Environmental Policy Act (“NEPA”).8 In accordance with NEPA, FERC staff must prepare either an Environmental Assessment (“EA”) or an Environmental Impact Statement (“EIS”). A public comment period may be provided for an EA and is always provided for a Draft EIS, which will ultimately be converted into a Final EIS.

Because the environmental review of a project is the time drag on the FERC’s processing of an application for the construction of interstate natural gas pipeline facilities, a pipeline company is permitted (but not required) to initiate the environmental review process six to eight months before the application itself is filed. So-called “pre-filing” has become the preferred approach at the FERC and requires that the pipeline submit the same environmental information detailed above that would have been submitted at a later time when the application is filed. The pre-filing process also assumes that the pipeline company will attempt to resolve issues raised by landowners, environmental/conservation groups, agencies, and public officials in order that disputed environmental issues which must be resolved by the FERC will be minimized.

The FERC review process culminates in the issuance of an order (otherwise referred to as a “certificate of public convenience and necessity”) by the FERC that grants, with or without project modification, or denies the requested authorization for the project. The order may mandate certain changes to the project (not just the physical project, but in areas such as how rates are calculated or accounting entries made) and has extensive construction-related conditions attached to it that will govern when and how construction, restoration and post construction compliance proceed. If the order issued by the FERC is acceptable to the pipeline, construction (very broadly defined) cannot begin until certain pre-construction conditions are met as dictated by the order approving the project.

8 42 U.S.C. §§ 4331, et seq.

8 6964319 -

The entire process, including the pipeline company’s planning activities and public outreach efforts (that start long before the application is filed with the FERC), takes 9-14 months for a simple project (of which FERC review takes five to six months), 20-25 months for a moderately complex project (of which FERC review takes six to eight months) and 34 to 40 months for a complex project (of which FERC review takes 10 months minimum, and longer if public opposition is particularly vocal and/or certain hot button issues are raised by the project proposal).

Among the most significant grants provided to the pipeline company in an order approving a project is the power of eminent domain as set forth in the NGA. This power is conveyed by the NGA via the certificate order to permit the pipeline company to acquire land rights which are necessary for the approved project but not obtainable by voluntary acquisition means. FERC prefers pipelines keep eminent domain use to a minimum even though the NGA itself has no such limiting theme. Without it, it would be difficult if not impossible for interstate natural gas pipelines to build, replace and expand pipeline and storage facilities in today’s congested areas, and even in areas where there is opposition to energy infrastructure construction.

Any party, including the pipeline company, who is dissatisfied with the order may ask the

FERC to reconsider the order within 30 days. There is no time deadline for FERC to act on those requests. Ultimately, after FERC has issued its final rulings, parties can seek review in the

United States Courts of Appeals for either the D.C. Circuit or in the federal circuit in which the pipeline company is located or has its principal place of business. Such a petition for review must be filed within 60 days of the issuance of the final FERC order. There is no time deadline for a federal circuit court to act on a petition for review of orders from the FERC.

9 6964319 ϴͬϮϴͬϮϬϭϱ

&ZKǀĞƌǀŝĞǁĂŶĚhƉĚĂƚĞ

D>&Θ/> ϲƚŚ >ĂǁŽĨ^ŚĂůĞWůĂLJƐŽŶĨĞƌĞŶĐĞ

KŵŶŝtŝůůŝĂŵWĞŶŶ,ŽƚĞů͕WŝƚƚƐďƵƌŐŚ͕WϭϱϮϭϵ

^ĞƉƚĞŵďĞƌϭϬͲϭϭ͕ϮϬϭϱ

<Ƶƌƚ>͘<ƌŝĞŐĞƌ

dŽĚĂLJ͛ƐdŽƉŝĐƐ

• &Z'ĂƐ:ƵƌŝƐĚŝĐƚŝŽŶĂůĂƐŝĐƐ • EĞǁĞǀĞůŽƉŵĞŶƚƐ

ϭ ϴͬϮϴͬϮϬϭϱ

&Z'ĂƐ:ƵƌŝƐĚŝĐƚŝŽŶĂůĂƐŝĐƐ

tŚĂƚŝƐ&Z͍ • /ŶĚĞƉĞŶĚĞŶƚĨĞĚĞƌĂůƌĞŐƵůĂƚŽƌLJ ĂŐĞŶĐLJ Ͳ tĂƐŚŝŶŐƚŽŶ͕ Ͳ &ŝǀĞƌĞŐŝŽŶĂůŽĨĨŝĐĞƐĨŽƌŚLJĚƌŽĞůĞĐƚƌŝĐĚĂŵƐĂĨĞƚLJ Ͳ ϭϬŝŶƚĞƌŶĂůĨƵŶĐƚŝŽŶĂůŽĨĨŝĐĞƐ • &ŝǀĞͲŵĞŵďĞƌŽŵŵŝƐƐŝŽŶ Ͳ ^ƚĂŐŐĞƌĞĚĨŝǀĞͲLJĞĂƌƚĞƌŵƐ Ͳ EŽŵŽƌĞƚŚĂŶƚŚƌĞĞĨƌŽŵƐĂŵĞƉŽůŝƚŝĐĂůƉĂƌƚLJ Ͳ WƌĞƐŝĚĞŶƚŝĂůĂƉƉŽŝŶƚŵĞŶƚͬ^ĞŶĂƚĞĐŽŶĨŝƌŵĂƚŝŽŶ • ϮϬϭϰďƵĚŐĞƚ͗ΨϯϬϰ͘ϲŵŝůůŝŽŶ • DŽƌĞƚŚĂŶϭ͕ϰϯϮ&dƐ • ϭϮƐĞƉĂƌĂƚĞĨƵŶĐƚŝŽŶĂůŽĨĨŝĐĞƐ

Ϯ ϴͬϮϴͬϮϬϭϱ

&ZϭϬϭ

• ŶĨŽƌĐĞŵĞŶƚ • /ŶƚĞƌƐƚĂƚĞEĂƚƵƌĂů'ĂƐWŝƉĞůŝŶĞƐ • /ŶƚĞƌƐƚĂƚĞůĞĐƚƌŝĐdƌĂŶƐŵŝƐƐŝŽŶĂŶĚ 'ĞŶĞƌĂƚŝŽŶ • ,LJĚƌŽĞůĞĐƚƌŝĐ&ĂĐŝůŝƚŝĞƐ • KŝůŽƌWƌŽĚƵĐƚƐWŝƉĞůŝŶĞƐ

ϱ

&ZŶĨŽƌĐĞŵĞŶƚWŽǁĞƌƐ

• WŽƐƚͲEZKEʹ ƉĞŶĂůƚŝĞƐ ĨŽƌŶŽŶͲ ĐŽŵƉůŝĂŶĐĞĂƌĞ ƐŝŐŶŝĨŝĐĂŶƚ͗ Ͳ ŝǀŝů ƉĞŶĂůƚLJĂƵƚŚŽƌŝƚLJ͗ΨϭŵŝůůŝŽŶƉĞƌ ĚĂLJͬƉĞƌǀŝŽůĂƚŝŽŶ Ͳ ƌŝŵŝŶĂů͗ΨϭŵŝůůŝŽŶĂŶĚϱLJĞĂƌƐ ŝŵƉƌŝƐŽŶŵĞŶƚĨŽƌŬŶŽǁŝŶŐĂŶĚǁŝůůĨƵů ǀŝŽůĂƚŝŽŶƐŽĨƚŚĞůĂǁ

ϯ ϴͬϮϴͬϮϬϭϱ

&Z:ƵƌŝƐĚŝĐƚŝŽŶ;'ĂƐͿ

• EĂƚƵƌĂů'ĂƐĐƚ;͞E'͟Ϳ • dƌĂŶƐƉŽƌƚĂƚŝŽŶŽĨŶĂƚƵƌĂůŐĂƐ;ĂŶĚŐĂƐƐĂůĞƐĨŽƌ ƌĞƐĂůĞͿŝŶŝŶƚĞƌƐƚĂƚĞĐŽŵŵĞƌĐĞ • ZĞŐƵůĂƚĞƐĐŽŵƉĂŶŝĞƐƚŚĂƚĚŽĞŝƚŚĞƌ • ZĞŐƵůĂƚĞƐŝŶƚĞƌƐƚĂƚĞŶĂƚƵƌĂůŐĂƐƉŝƉĞůŝŶĞƐ – dĂƌŝĨĨƐ͕ƌĂƚĞƐ͕ƚĞƌŵƐŽĨƐĞƌǀŝĐĞ͕ĐŽŶƚƌĂĐƚƐ͕ƐŝƚŝŶŐ ĂŶĚĐŽŶƐƚƌƵĐƚŝŽŶ • EŽũƵƌŝƐĚŝĐƚŝŽŶŽǀĞƌ͞ƉƌŽĚƵĐƚŝŽŶŽƌŐĂƚŚĞƌŝŶŐ͟ • tŚĂƚ͛Ɛ͞ŐĂƚŚĞƌŝŶŐ͍͟ʹ EŽE'ĚĞĨŝŶŝƚŝŽŶ

ϳ

tŚLJĂƌĞďŽƵƚZĞŐƵůĂƚŝŽŶ͍

• t,K͍ – dƌĂŶƐƉŽƌƚŝŶŐŐĂƐŽŶƉŝƉĞůŝŶĞƐ – ƵLJŝŶŐŽƌďƵŝůĚŝŶŐƉŝƉĞůŝŶĞƐ • t,d͍ʹ ZĞŐƵůĂƚŝŽŶ/ŵƉĂĐƚƐ͗ – WĞƌŵŝƐƐŝďůĞƌĂƚĞƐĂŶĚĐŽŶƚƌĂĐƚƚĞƌŵƐŽĨƐĞƌǀŝĐĞ ;ŐĂƐƋƵĂůŝƚLJ͕ĨŝƌŵͬŝŶƚĞƌƌƵƉƚŝďůĞ͕ďĂůĂŶĐŝŶŐ͕ĞƚĐ͘Ϳ – dŝŵŝŶŐĂŶĚƉĞƌŵŝƐƐŝďŝůŝƚLJŽĨĨĂĐŝůŝƚLJ ĐŽŶƐƚƌƵĐƚŝŽŶ – ƵĞĚŝůŝŐĞŶĐĞŽŶƉŝƉĞůŝŶĞĂƐƐĞƚƐĂŶĚƚŚĞŝƌ ƌĞŐƵůĂƚŽƌLJƐƚĂƚƵƐ ϴ

ϰ ϴͬϮϴͬϮϬϭϱ

WƌĞĐĞĚĞŶƚĂŶĚ^ĞƌǀŝĐĞŐƌĞĞŵĞŶƚƐ

EŽŶͲŽŶĨŽƌŵŝŶŐĂŶĚDĂƚĞƌŝĂůĞǀŝĂƚŝŽŶƐ • ŶĨŽƌĐĞĂďŝůŝƚLJ • /ƐŝƚŝŶŽƌŽƚŚĞƌǁŝƐĞĐŽŶƚĞŵƉůĂƚĞĚďLJƚŚĞƚĂƌŝĨĨ ĂŶĚƚŚĞƉƌŽĨŽƌŵĂƐĞƌǀŝĐĞĂŐƌĞĞŵĞŶƚ͍ • ŝƐĐƌŝŵŝŶĂƚŽƌLJĂŶĚŝŶƚĞƌĨĞƌĞǁŝƚŚƐĞƌǀŝĐĞƚŽ ŽƚŚĞƌƐŚŝƉƉĞƌƐ͕ŽƌŶŽƚ͍ • ^ŝĚĞĂŐƌĞĞŵĞŶƚƐ͍ • &ŝůŝŶŐƌĞƋƵŝƌĞŵĞŶƚ • /ŵƉĂĐƚƐďŝŶĚŝŶŐĞĨĨĞĐƚ

ŽŶĨŝĚĞŶƚŝĂůƚƚŽƌŶĞLJͲůŝĞŶƚWƌŝǀŝůĞŐĞĚ

&Z'ĂƚŚĞƌŝŶŐdžĞŵƉƚŝŽŶ

• hŶĚĞƌE'Α ϭ;ďͿ͕ŶŽ&ZũƵƌŝƐĚŝĐƚŝŽŶŽǀĞƌ ͞ƉƌŽĚƵĐƚŝŽŶŽƌŐĂƚŚĞƌŝŶŐ͟ŽĨŐĂƐ͕hd͗ • dǁŽƐĐĞŶĂƌŝŽƐ͗ • 'ĂƚŚĞƌŝŶŐƉƌŽǀŝĚĞĚďLJĂŶŝŶƚĞƌƐƚĂƚĞ ƉŝƉĞůŝŶĞ͗ വ &ZƌĞŐƵůĂƚĞƐƚŚĞƌĂƚĞƐĂŶĚƚĞƌŵƐŽĨƐĞƌǀŝĐĞ ;ďƵƚŶŽƚƚŚĞĨĂĐŝůŝƚŝĞƐͿĨŽƌŐĂƚŚĞƌŝŶŐƐĞƌǀŝĐĞƐ ƉƌŽǀŝĚĞĚďLJĂŶŝŶƚĞƌƐƚĂƚĞƉŝƉĞůŝŶĞƵŶĚĞƌE' Α ϰ͞ŝŶĐŽŶŶĞĐƚŝŽŶǁŝƚŚ͟ũƵƌŝƐĚŝĐƚŝŽŶ

ϱ ϴͬϮϴͬϮϬϭϱ

&Z'ĂƚŚĞƌŝŶŐdžĞŵƉƚŝŽŶ

• 'ĂƚŚĞƌŝŶŐƉƌŽǀŝĚĞĚďLJĂĨĨŝůŝĂƚĞ ŽĨĂŶŝŶƚĞƌƐƚĂƚĞ ƉŝƉĞůŝŶĞ͗ വ ZĞƋƵŝƌĞĚWŝƉĞůŝŶĞdĂƌŝĨĨWƌŽǀŝƐŝŽŶ͗ o WŝƉĞůŝŶĞǁŝůůĂĐƚŝŶĂŶŽŶͲĚŝƐĐƌŝŵŝŶĂƚŽƌLJ ŵĂŶŶĞƌƚŽǁĂƌĚĂůůƐƵƉƉůLJ o EŽƚƚŝĞƌĞĐĞŝƉƚŽĨƉŝƉĞůŝŶĞƐĞƌǀŝĐĞƐƚŽƐĞƌǀŝĐĞ ŽŶƚŚĞŐĂƚŚĞƌŝŶŐĂĨĨŝůŝĂƚĞ o EŽƚŐƌĂŶƚĂŶLJƵŶĚƵĞƉƌĞĨĞƌĞŶĐĞƚŽƐŚŝƉƉĞƌƐ ŽŶƚŚĞŐĂƚŚĞƌŝŶŐĂĨĨŝůŝĂƚĞ

,ŽǁŝƐ'ĂƚŚĞƌŝŶŐĞĨŝŶĞĚ͍

• E'ĚŽĞƐŶŽƚĚĞĨŝŶĞ͞ŐĂƚŚĞƌŝŶŐ͟ • &ZƵƐĞƐĂ͞ŵŽĚŝĨŝĞĚƉƌŝŵĂƌLJĨƵŶĐƚŝŽŶ ƚĞƐƚ͟ʹ ĂƐŝdžͲƉĂƌƚĨƵŶĐƚŝŽŶĂůƚĞƐƚ • ůƐŽ͗ƉƵƌƉŽƐĞ͕ůŽĐĂƚŝŽŶ͕ŽƉĞƌĂƚŝŽŶŽĨ ĨĂĐŝůŝƚŝĞƐĂŶĚďƵƐŝŶĞƐƐĂĐƚŝǀŝƚŝĞƐŽĨŽǁŶĞƌ • EŽƐŝŶŐůĞĨĂĐƚŽƌĚĞƚĞƌŵŝŶĂƚŝǀĞ

ϲ ϴͬϮϴͬϮϬϭϱ

&Z'ĂƚŚĞƌŝŶŐdĞƐƚ

^ŝdžͲƉĂƌƚƚĞƐƚ͗ ϭ͘ >ĞŶŐƚŚͬĚŝĂŵĞƚĞƌŽĨƚŚĞƉŝƉĞůŝŶĞƐ Ϯ͘ džƚĞŶƐŝŽŶďĞLJŽŶĚĐĞŶƚƌĂůƉŽŝŶƚŝŶƚŚĞ ĨŝĞůĚ ϯ͘ 'ĞŽŐƌĂƉŚŝĐĐŽŶĨŝŐƵƌĂƚŝŽŶ ϰ͘ >ŽĐĂƚŝŽŶŽĨĐŽŵƉƌĞƐƐŝŽŶͬƉƌŽĐĞƐƐŝŶŐ ϱ͘ >ŽĐĂƚŝŽŶŽĨǁĞůůƐ ϲ͘ KƉĞƌĂƚŝŶŐƉƌĞƐƐƵƌĞƐ

&Z'ĂƚŚĞƌŝŶŐʹ ^ƚƵď>ŝŶĞƐ

• &ŽĐƵƐ͗'ĂƐƉŝƉĞůŝŶĞĚŽǁŶƐƚƌĞĂŵŽĨƚŚĞ ŐĂƐƉƌŽĐĞƐƐŝŶŐƉůĂŶƚ • ͞&ŝǀĞͲŵŝůĞƌƵůĞ͟ • DŽƌĞƚŚĂŶĨŝǀĞŵŝůĞƐŝŶůĞŶŐƚŚ͍ • &ZũƵƌŝƐĚŝĐƚŝŽŶĂůƚƌĂŶƐŵŝƐƐŝŽŶůŝŶĞ

ϳ ϴͬϮϴͬϮϬϭϱ

EŽ^ŝŵƉůĞ>ĂďĞůƐ

hƉƐƚƌĞĂŵͲ tĞůůŚĞĂĚ о WƌŽĚƵĐƚŝŽŶ о 'ĂƚŚĞƌŝŶŐ͕DŝĚƐƚƌĞĂŵĂŶĚWƌŽĐĞƐƐŝŶŐ о /ŶƚĞƌƐƚĂƚĞdƌĂŶƐŵŝƐƐŝŽŶďLJWŝƉĞůŝŶĞ о ŝƐƚƌŝďƵƚŝŽŶďLJ>ŽĐĂůŝƐƚƌŝďƵƚŝŽŶ ŽŵƉĂŶŝĞƐ;>ƐͿ ŽǁŶƐƚƌĞĂŵʹ ƵƌŶĞƌdŝƉ

ϭϱ

&Z:ƵƌŝƐĚŝĐƚŝŽŶʹ tŝƚŚŝŶ^ƚĂƚĞ

• ĂƵƚŝŽŶʹ &ZũƵƌŝƐĚŝĐƚŝŽŶŵĂLJĂƉƉůLJ • ĨĨĞĐƚŽĨĐƌŽƐƐŝŶŐƐƚĂƚĞůŝŶĞƐ • /ŶƚĞƌƐƚĂƚĞƐĞƌǀŝĐĞǁŝƚŚŝŶƚŚĞďŽƵŶĚĂƌŝĞƐŽĨ ĂƐƚĂƚĞ • ^ƚĂƚĞďŽƵŶĚĂƌŝĞƐŶŽƚ ĚĞƚĞƌŵŝŶĂƚŝǀĞĂƐƚŽ &ZũƵƌŝƐĚŝĐƚŝŽŶ • džĂŵƉůĞƐ͘͘͘

ϭϲ

ϴ ϴͬϮϴͬϮϬϭϱ

&Z:ƵƌŝƐĚŝĐƚŝŽŶʹ tŝƚŚŝŶ^ƚĂƚĞ

&Z:ƵƌŝƐĚŝĐƚŝŽŶʹ tŝƚŚŝŶ^ƚĂƚĞ

ϵ ϴͬϮϴͬϮϬϭϱ

EĞǁĞǀĞůŽƉŵĞŶƚƐ

tŚĂƚ͛Ɛ,Žƚ͍

• WŝƉĞůŝŶĞŽŶƐƚƌƵĐƚŝŽŶʹ ĞƌƚŝĨŝĐĂƚĞ WƌŽĐĞĞĚŝŶŐƐ • DŽĚĞƌŶŝnjĂƚŝŽŶŽƐƚZĞĐŽǀĞƌLJ^ƵƌĐŚĂƌŐĞ DĞĐŚĂŶŝƐŵƐ • 'ĂƐͲůĞĐƚƌŝĐŽŽƌĚŝŶĂƚŝŽŶ • ZŝĐĞŶĞƌŐLJWĞƚŝƚŝŽŶŽŶDƐ • >/ŶǀĞƐƚŵĞŶƚŝŶWƌŽĚƵĐƚŝŽŶƐƐĞƚƐ • WůĞĂŶWŽǁĞƌWůĂŶ;WWͿ

ϭϬ ϴͬϮϴͬϮϬϭϱ

&ZĞƌƚŝĨŝĐĂƚŝŽŶWƌŽĐĞƐƐ • ƉƉůŝĐĂƚŝŽŶƚŽďƵŝůĚĂŶŝŶƚĞƌƐƚĂƚĞƉŝƉĞůŝŶĞ ŽƌƐƚŽƌĂŐĞĨĂĐŝůŝƚLJ Ͳ /ŶĐůƵĚĞƐƉƌŽƉŽƐĞĚƉŝƉĞůŝŶĞƌŽƵƚĞĂŶĚĞŶǀŝƌŽŶŵĞŶƚĂůƌĞƉŽƌƚƐ Ͳ ZĞƋƵŝƌĞĚůĂŶĚŽǁŶĞƌŶŽƚŝĨŝĐĂƚŝŽŶ Ͳ /ŶƚĞƌǀĞŶĞƚŽƉƌŽƚĞĐƚLJŽƵƌŝŶƚĞƌĞƐƚƐ • &ZůĞĂĚĂŐĞŶĐLJƵŶĚĞƌEW – EWͲďĂƐĞĚĐŚĂůůĞŶŐĞƐ • &ZƉƌĞƉĂƌĞƐŽƌ/^ • &ZŽƌĚĞƌĂƉƉƌŽǀŝŶŐ;ĐĞƌƚŝĨŝĐĂƚĞͿ Ͳ ƉƉƌŽǀĞƐƌŽƵƚĞĂŶĚĞŶǀŝƌŽŶŵĞŶƚĂůĐŽŶĚŝƚŝŽŶƐ ͲŵŝŶĞŶƚĚŽŵĂŝŶ

ϭϭ ϴͬϮϴͬϮϬϭϱ

WƌŽƚĞƐƚŽƌƐ͙ƚ&Z͍͍͊

^ƚĂŬĞŚŽůĚĞƌKƵƚƌĞĂĐŚ

• /E'ŽĚĞŽĨŽŶĚƵĐƚ • ͞^ƵŐŐĞƐƚĞĚĞƐƚWƌĂĐƚŝĐĞƐĨŽƌ/ŶĚƵƐƚƌLJ KƵƚƌĞĂĐŚWƌŽŐƌĂŵƐƚŽ^ƚĂŬĞŚŽůĚĞƌƐ͟

ϭϮ ϴͬϮϴͬϮϬϭϱ

WŝƉĞůŝŶĞĐĐĞƐƐƚŽWƌŽƉĞƌƚŝĞƐ

• ^ƵƌǀĞLJƐ • ^ƵƌǀĞLJƐ • ^ƵƌǀĞLJƐ • ^ƵƌǀĞLJƐ

/ŶƚĞƌƐƚĂƚĞ'ĂƐ^ƚŽƌĂŐĞ&ŝĞůĚƐ

• &ZũƵƌŝƐĚŝĐƚŝŽŶĂů • WƌŽĚƵĐƚŝŽŶĂŶĚŵŝŐƌĂƚŝŽŶ • džƉĂŶƐŝŽŶŽĨƌĞƐĞƌǀŽŝƌĂŶĚƉƌŽƚĞĐƚŝǀĞ ;ďƵĨĨĞƌͿďŽƵŶĚĂƌŝĞƐ

ϭϯ ϴͬϮϴͬϮϬϭϱ

DŽĚĞƌŶŝnjĂƚŝŽŶŽƐƚZĞĐŽǀĞƌLJ^ƵƌĐŚĂƌŐĞ

• ĂƐĞƌĂƚĞƐǀƐ͘^ƵƌĐŚĂƌŐĞƌĂƚĞƐ • WŝƉĞůŝŶĞƐĨĂĐŝŶŐŝŶĐƌĞĂƐĞĚĐŽƐƚƐĨŽƌƐĂĨĞƚLJĂŶĚƌĞůŝĂďŝůŝƚLJ ĐŽŵƉůŝĂŶĐĞƉƵƌƉŽƐĞƐ • DŽĚĞƌŶŝnjĂƚŝŽŶWŽůŝĐLJ^ƚĂƚĞŵĞŶƚƉƌŝůϭϲ͕ϮϬϭϱ͕ ĞĨĨĞĐƚŝǀĞKĐƚŽďĞƌϭ͕ϮϬϭϱ • ůůŽǁƐ͞ŝŶƚĞƌƐƚĂƚĞŶĂƚƵƌĂůŐĂƐƉŝƉĞůŝŶĞƐƚŽƐĞĞŬƚŽ ƌĞĐŽǀĞƌ ĐĞƌƚĂŝŶĐĂƉŝƚĂůĞdžƉĞŶĚŝƚƵƌĞƐŵĂĚĞƚŽ ŵŽĚĞƌŶŝnjĞƐLJƐƚĞŵŝŶĨƌĂƐƚƌƵĐƚƵƌĞƚŚƌŽƵŐŚĂƐƵƌĐŚĂƌŐĞ ƌĂƚĞŵĞĐŚĂŶŝƐŵ͕ƐƵďũĞĐƚƚŽĐŽŶĚŝƚŝŽŶƐ͘͘͘ƚŽĞŶƐƵƌĞ ƚŚĂƚƚŚĞƌĞƐƵůƚŝŶŐƌĂƚĞƐĂƌĞũƵƐƚĂŶĚƌĞĂƐŽŶĂďůĞĂŶĚ ƉƌŽƚĞĐƚŶĂƚƵƌĂůŐĂƐĐŽŶƐƵŵĞƌƐĨƌŽŵĞdžĐĞƐƐŝǀĞĐŽƐƚƐ͘͟

DŽĚĞƌŶŝnjĂƚŝŽŶ Ͳ &ŝǀĞŽŶĚŝƚŝŽŶƐ

• ZĞǀŝĞǁŽĨĞdžŝƐƚŝŶŐďĂƐĞƌĂƚĞƐ – ZĂƚĞĐĂƐĞƐĂŶĚƌĂƚĞͬĐŽƐƚƐĞƚƚůĞŵĞŶƚ ĚŝƐĐƵƐƐŝŽŶƐ • ZĞĐŽǀĞƌŽŶůLJĞůŝŐŝďůĞĐŽƐƚƐ • ǀŽŝĚĐŽƐƚƐŚŝĨƚŝŶŐ • WĞƌŝŽĚŝĐƌĞǀŝĞǁŽĨƐƵƌĐŚĂƌŐĞĂŶĚďĂƐĞ ƌĂƚĞƐ • ^ŚŝƉƉĞƌƐƵƉƉŽƌƚ

ϭϰ ϴͬϮϴͬϮϬϭϱ

'ĂƐůĞĐƚƌŝĐŽŽƌĚŝŶĂƚŝŽŶ

• ^ĐŚĞĚƵůŝŶŐŽĨŐĂƐĨŽƌƚƌĂŶƐƉŽƌƚĂƚŝŽŶŽŶŝŶƚĞƌƐƚĂƚĞ ƉŝƉĞůŝŶĞƐ – ͞dŽďĞƚƚĞƌĐŽŽƌĚŝŶĂƚĞƚŚĞƐĐŚĞĚƵůŝŶŐƉƌĂĐƚŝĐĞƐŽĨƚŚĞ ǁŚŽůĞƐĂůĞŶĂƚƵƌĂůŐĂƐĂŶĚĞůĞĐƚƌŝĐŝŶĚƵƐƚƌŝĞƐ͕ĂƐǁĞůůĂƐƚŽ ƉƌŽǀŝĚĞĂĚĚŝƚŝŽŶĂůƐĐŚĞĚƵůŝŶŐĨůĞdžŝďŝůŝƚLJƚŽĂůůƐŚŝƉƉĞƌƐ͙͘͟ • EĂƚŝŽŶǁŝĚĞĚĂLJͲĂŚĞĂĚƚŝŵĞůLJŶŽŵŝŶĂƚŝŽŶĚĞĂĚůŝŶĞ ĨŽƌƐĐŚĞĚƵůŝŶŐŵŽǀĞĚĨƌŽŵϭϭ͗ϯϬĂŵĞŶƚƌĂůƚŽϭƉŵ ĞŶƚƌĂů;ĂƐŽĨDĂƌĐŚϯϭ͕ϮϬϭϲͿ • /ŶĐƌĞĂƐĞĚŶƵŵďĞƌŽĨŝŶƚƌĂĚĂLJŶŽŵŝŶĂƚŝŽŶƐĨƌŽŵϮƚŽ ϯ;ϭϬĂŵ͕Ϯ͗ϯϬƉŵ͕ĂŶĚϳƉŵĂƐŽĨƉƌŝůϭ͕ϮϬϭϲͿ • &ZƚĂŬŝŶŐĐŽŵŵĞŶƚƐŽŶƌĞĐĂůůƌŝŐŚƚƐƚŝŵŝŶŐŝƐƐƵĞƐ

ZŝĐĞŶĞƌŐLJWĞƚŝƚŝŽŶͲ DƐ

• WĞƚŝƚŝŽŶĨŽƌĞĐůĂƌĂƚŽƌLJKƌĚĞƌ • ĂƉĂĐŝƚLJZĞůĞĂƐĞ • ƐƐĞƚDĂŶĂŐĞŵĞŶƚŐƌĞĞŵĞŶƚƐ;DƐͿ • ^ƵƉƉůLJͲƐŝĚĞǀƐ͘ĞůŝǀĞƌLJͲƐŝĚĞDƐ

ϭϱ ϴͬϮϴͬϮϬϭϱ

>/ŶǀĞƐƚŵĞŶƚŝŶWƌŽĚƵĐƚŝŽŶƐƐĞƚƐ

• EĞǁĂŶĚĞdžŝƐƚŝŶŐƐƚĂƚƵƚĞƐ • KĐĐƵƌƌŝŶŐŝŶŵƵůƚŝƉůĞƐƚĂƚĞƐ • ĂƉŝƚĂůŝŶǀĞƐƚŵĞŶƚƐ • 'ĂƐƉƌŝĐĞŚĞĚŐĞ • ƵĞĚŝůŝŐĞŶĐĞ

WůĞĂŶWŽǁĞƌWůĂŶ;WWͿ • ZĞůŝĂďŝůŝƚLJͲĨŽĐƵƐĞĚdĞĐŚŶŝĐĂůŽŶĨĞƌĞŶĐĞƐ͖EZ • hƉŽŶŝƐƐƵĂŶĐĞŽĨWWĨŝŶĂůƌƵůĞŽŶƵŐƵƐƚϯ͕ϮϬϭϱ͕ ŽŵŵŝƐƐŝŽŶĞƌdŽŶLJůĂƌŬ͗ – ͞&ZŵƵƐƚƚĂŬĞĂůĞĂĚĞƌƐŚŝƉƌŽůĞďLJƌĞƋƵŝƌŝŶŐƚŚĂƚƚŚĞ&ĞĚĞƌĂů WŽǁĞƌĐƚ͕ǁŚŝĐŚŐŽǀĞƌŶƐƌĞůŝĂďŝůŝƚLJ͕ƌĂƚĞƐĂŶĚŵĂƌŬĞƚƐ͕ĚŽĞƐ ŶŽƚƚĂŬĞĂďĂĐŬƐĞĂƚƚŽĂŶĞŶĞƌŐLJƉůĂŶƉƌŽŵƵůŐĂƚĞĚƵŶĚĞƌĂ ƐĞƉĂƌĂƚĞƐƚĂƚƵƚĞ͘͞ – ͞WŽĨĨŝĐŝĂůƐĂƌĞŶŽƚƌĞƐƉŽŶƐŝďůĞĨŽƌĞŶƐƵƌŝŶŐƌĞůŝĂďůĞ͕ ĂĨĨŽƌĚĂďůĞƉŽǁĞƌ͘͟ • tŚĂƚǁŝůů&ZĚŽŶĞdžƚ͍ • DĞĂŶǁŚŝůĞ&ZŝƐŬĞĞŶůLJĂǁĂƌĞŽĨŶĞĞĚĨŽƌĂŶĚ ŝŵƉŽƌƚĂŶĐĞŽĨŶĂƚƵƌĂůŐĂƐƉŝƉĞůŝŶĞŝŶĨƌĂƐƚƌƵĐƚƵƌĞ

ϭϲ ϴͬϮϴͬϮϬϭϱ

KƚŚĞƌ

• >E'ĞdžƉŽƌƚĨĂĐŝůŝƚŝĞƐ • WŝƉĞůŝŶĞƉĞƌŵŝƚƚŝŶŐ;ůĞŐŝƐůĂƚŝŽŶͿ • hŶĂƵƚŚŽƌŝnjĞĚĚŝƐĐůŽƐƵƌĞƐďLJ&Z ƉĞƌƐŽŶŶĞů;ůĞŐŝƐůĂƚŝŽŶͿ • KŝůͬƉƌŽĚƵĐƚƐƉŝƉĞůŝŶĞƌĞŐƵůĂƚŝŽŶ&ŽƌŵEŽ͘ϲ • KEK<ĞĐŝƐŝŽŶ • 'ĂƐYƵĂůŝƚLJ

ϭϳ 3DJHRI

1LFROOH56Q\GHU%DJQHOO 3LWWVEXUJK 7  3DUWQHU ) 

QEDJQHOO#UHHGVPLWKFRP

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³)DVW7UDFNHU´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¶V$QQXDO,QVWLWXWH±2LODQG RIWKH1DWLRQDO$VVRFLDWLRQ *DV&KDLU  RI(QYLURQPHQWDO/DZ 6RFLHWLHV +DUYDUG8QLYHUVLW\ ,QWKH1HZV $%FXPODXGH (QYLURQPHQWDO6FLHQFHDQG 3XEOLF3ROLF\+HQU\ (QHUJ\6SRWOLJKW1LFROOH6Q\GHU%DJQHOOE\.DWHO\Q)HUUDO 5RVRYVN\6FKRODU 3LWWVEXUJK7ULEXQH5HYLHZ V2QWKH*ULG1RYHPEHU 5HFHLYHGD&RPPHQGDWLRQ IURPWKH*RYHUQRURI )ORULGDIRUKHUUHVHDUFKRQ ([SHULHQFH EHDFKHURVLRQ7KHVLVZDV WLWOHG6HWWLQJWKH6WDQGDUGV 3DJHRI

IRU%HDFK(URVLRQ&RQWURO 5HSUHVHQWHGRLODQGJDVLQGXVWU\JURXSVDQGQDWXUDOJDV ,V$Q\6ROXWLRQ SURGXFHUVLQQXPHURXVFDVHVLQYROYLQJWKH3HQQV\OYDQLD $FFHSWDEOH" 0LQLPXP5R\DOW\$FWLQFOXGLQJ.LOPHU

3URIHVVLRQDO :RQFODVVDFWLRQFODLPVRYHUULJKWWRH[WHQGOHDVHRQRULJLQDO WHUPVUDWKHUWKDQFXUUHQWPDUNHWSULFHV $GPLVVLRQV 4XDOLILFDWLRQV :RQWKHOHDGLQJIHGHUDODQG3HQQV\OYDQLDFDVHVUHJDUGLQJ GXDOSXUSRVHOHDVHVDQGSURWHFWHGSURGXFHU¶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

6XFFHVVIXOO\VHWWOHGFDVHVZKLFKDOORZHGQDWXUDOJDVSLSHOLQH FRPSDQ\WRUHFRYHUFRVWVLQFXUUHGGXHWRVXEVLGHQFH

6XFFHVVIXOO\UHSUHVHQWHGDORFDOJDVGLVWULEXWLRQFRPSDQ\LQ DQDSSHDOWRWKH3HQQV\OYDQLD6XSUHPH&RXUWRYHUZKHWKHU JDVFRPSDQLHVDUHOLDEOHIRUHFRQRPLFGDPDJHVXQGHUWKH 2QH&DOO$FW

:RQDFWLRQEHIRUH38&DQG3HQQV\OYDQLD&RPPRQZHDOWK &RXUWKROGLQJQRMXULVGLFWLRQRYHUQDWXUDOJDVSLSHOLQH FRPSDQ\RUXWLOLW\

5HSUHVHQWHGLQWHUVWDWHQDWXUDOJDVFRPSDQLHVLQFRXUWDQG UHJXODWRU\DJHQFLHVLQGLVSXWHVZLWKFRDOPLQLQJRSHUDWLRQV

:RQRUVHWWOHGQXPHURXVDFWLRQVIRUQDWXUDOJDVXWLOLWLHVDQG SLSHOLQHFRPSDQLHVWRVWRSODQGRZQHUVDQGGHYHORSHUVIURP HQFURDFKLQJRQSLSHOLQHULJKWRIZD\VZHOOVLWHVDQGVWRUDJH ILHOGV

/HGWHDPSHUIRUPLQJGXHGLOLJHQFHIRUODUJHRLODQGQDWXUDO JDVWUDQVDFWLRQVLQFOXGLQJWKHVDOHRI0DUFHOOXV6KDOHULJKWV

1HZV 3XEOLFDWLRQV 1HZV

-XQH 3HQQV\OYDQLD3RZHUKRXVH5HHG6PLWK )LUP$ZDUG1HZV&OLSV

0D\ 5HHG6PLWK$QQRXQFHV6XSHU/DZ\HUV 5LVLQJ6WDUVLQ3HQQV\OYDQLD ,QGLYLGXDO$ZDUG1HZV5HOHDVHV

0DUFK%XVLQHVV:RPHQ)LUVW:LQQHU1LFROOH 6Q\GHU%DJQHOO ,QGLYLGXDO$ZDUG1HZV&OLSV 3DJHRI

$XJXVW 7KH/HJDO V/DZ\HUVRQWKH)DVW7UDFN ,QGLYLGXDO$ZDUG

0D\ 5HHG6PLWK$QQRXQFHV6XSHU/DZ\HUV 5LVLQJ6WDUVLQ3HQQV\OYDQLD 1HZV5HOHDVHV,QGLYLGXDO$ZDUG

0RUH

3XEOLFDWLRQV

)HEUXDU\ 3HQQV\OYDQLD6XSHULRU&RXUW&RQILUPV³2U´  0HDQV³2U´ 5HHG6PLWK&OLHQW$OHUWV &R$XWKRU V /XFDV/LEHQ &OLHQW$OHUWV

2FWREHU 3HQQV\OYDQLD6XSUHPH&RXUW&RQVLGHUV  (TXLWDEOH([WHQVLRQRI/HDVH7HUPV 5HHG6PLWK&OLHQW$OHUWV &R$XWKRU V 7KRPDV-*DOOLJDQ &OLHQW$OHUWV

-XO\ 'XDO3XUSRVH/HDVHVLQ3HQQV\OYDQLD:KDW 'RHVµRU¶0HDQ" 7KH/HJDO,QWHOOLJHQFHU &R$XWKRU V .HYLQ&$EERWW/XFDV/LEHQ $UWLFOHV3XEOLVKHG

-XQH 7KH6KDOH3D\±$Q8SGDWHRQ5HFHQW 7UHQGVLQ5R\DOW\&ODLPVDQG(PHUJLQJ ,VVXHV6XUURXQGLQJ:HW*DVDQG1*/V (QHUJ\ 0LQHUDO/DZ)RXQGDWLRQ &R$XWKRU V 6WHIDQLH/HSRUH%XUW $UWLFOHV3XEOLVKHG

0D\ /HDVH0DLQWHQDQFHDQG7LWOH,VVXHV$FURVV WKH6KDOH%DVLQV±3DUW0DUFHOOXV8WLFD 5RFN\0RXQWDLQ0LQHUDO/DZ)RXQGDWLRQ $UWLFOHV3XEOLVKHG

1RYHPEHU 7UHQGVLQWKH5HJXODWLRQRI+\GUDXOLF  )UDFWXULQJ $PHULFDQ%DU$VVRFLDWLRQ6HFWLRQRI (QYLURQPHQW(QHUJ\DQG5HVRXUFHV &R$XWKRU V 6WHIDQLH/HSRUH%XUW $UWLFOHV3XEOLVKHG

 3HQQV\OYDQLD$QQXDO5HSRUWRQ2LODQG*DV /HJDO'HYHORSPHQWV 5RFN\0RXQWDLQ0LQHUDO/DZ)RXQGDWLRQDQG WKH$PHULFDQ%DU$VVRFLDWLRQ6HFWLRQRI (QYLURQPHQW(QHUJ\DQG5HVRXUFHV &R$XWKRU V .HYLQ&$EERWW $UWLFOHV3XEOLVKHG

6HSWHPEHU 7KH,QWHUSOD\%HWZHHQ3URGXFWLRQDQG  8QGHUJURXQG6WRUDJH5LJKWVLQ 3HQQV\OYDQLD 3HQQV\OYDQLD%DU,QVWLWXWH 3DJHRI

$UWLFOHV3XEOLVKHG

'HFHPEHU 1DYLJDWLQJ3RWHQWLDO'HYHORSPHQW&RQIOLFWV  LQ6KDOH*DV5HVRXUFH3OD\V&RDODQG 2LO*DV&RQIOLFWV²0DUFHOOXV6KDOH 'HYHORSPHQWLQ&RDO&RXQWU\ (QHUJ\ 0LQHUDO/DZ)RXQGDWLRQ $UWLFOHV3XEOLVKHG

6SHDNLQJ(QJDJHPHQWV 0D\ 5RFN\0RXQWDLQ0LQHUDO/DZ)RXQGDWLRQLQ FRQMXQFWLRQZLWKWKH(QHUJ\ 0LQHUDO/DZ )RXQGDWLRQDQG$$3/±6SHFLDO,QVWLWXWHRQ 'HYHORSPHQW,VVXHVLQWKH0DMRU6KDOH3OD\V /HDVH0DLQWHQDQFHDQG7LWOH,VVXHV$FURVV WKH6KDOH%DVLQV±3DUW0DUFHOOXV8WLFD 3DQHOLVW  6WDWLRQ6TXDUH 3LWWVEXUJK3$ 6HPLQDU

1RYHPEHU 'HYHORSPHQWRI8QFRYHQWLRQDO*DV  &RQIHUHQFH'8*(DVW 0DMRU0LGVWUHDP,VVXHV 6HPLQDU

1RYHPEHU 7HFK/DZ)DOO&RQIHUHQFH  8QGHUVWDQGLQJ$QG'HDOLQJ:LWK7KH 5HJXODWRU\'HYHORSPHQW$QG3URGXFWLRQ ,VVXHV,Q7KH8QLWHG6WDWHV 5HHG6PLWK//3 3LWWVEXUJK3$ 6HPLQDU

 3HQQV\OYDQLD%DU,QVWLWXWH¶VUG$QQXDO2LO  6HSWHPEHU *DV/DZ&ROORTXLXP  7KH,QWHUSOD\%HWZHHQ3URGXFWLRQDQG 8QGHUJURXQG6WRUDJH5LJKWVLQ 3HQQV\OYDQLD 3LWWVEXUJK3$ 6HPLQDU

$SULO 8QLYHUVLW\RI3LWWVEXUJK/DZ5HYLHZDQGWKH ,QQRYDWLRQ3UDFWLFH,QVWLWXWH 5HFHQW'HFLVLRQV$IIHFWLQJWKH 'HYHORSPHQWRIWKH0DUFHOOXV6KDOHLQ 3HQQV\OYDQLD 8QLYHUVLW\&OXE 3LWWVEXUJK3$ 6HPLQDU

)HEUXDU\ 3HQQV\OYDQLD6WDWH8QLYHUVLW\0DUFHOOXV  6KDOH/DZDQG3ROLF\6\PSRVLXP (QYLURQPHQWDO5HJXODWLRQ,PSDFWLQJ 0DUFHOOXV6KDOH'HYHORSPHQW 6HPLQDU 3DJHRI

'HFHPEHU (QHUJ\ 0LQHUDO/DZ)RXQGDWLRQDQG5RFN\  0RXQWDLQ0LQHUDO/DZ)RXQGDWLRQ 1DYLJDWLQJ3RWHQWLDO'HYHORSPHQW&RQIOLFWV LQ6KDOH*DV5HVRXUFH3OD\V&RDODQG 2LO*DV&RQIOLFWV²0DUFHOOXV6KDOH 'HYHORSPHQWLQ&RDO&RXQWU\ :HVWLQ&RQYHQWLRQ&HQWHU+RWHO 3LWWVEXUJK3$ 6HPLQDU

‹5HHG6PLWK//3$OOULJKWVUHVHUYHG Recent Developments in Royalty Litigation in the Shale Plays

Nicolle R. Snyder Bagnell Kevin C. Abbott Thomas Galligan Reed Smith LLP 225 Fifth Ave. Pittsburgh, PA 15222

6th Law of Shale Plays Conference September 10 & 11, 2015 Pittsburgh, PA Nicolle R. Snyder Bagnell Kevin C. Abbott Thomas J. Galligan Reed Smith LLP 225 Fifth Avenue Pittsburgh, PA 15222 (412) 288-3131

Recent Developments in Royalty Litigation in the Shale Plays

Now that shale formations in Texas, Appalachia and elsewhere are in active production and royalties on that production are being paid, questions regarding those royalties and how they should be calculated and paid are receiving increased attention. This is particularly true in light of lower natural gas prices and the resulting reduction in profits on gas sold. This paper will discuss some of the recent cases addressing these issues.

§XX.01 Post-Production Costs.

The most significant question that has been addressed by courts is which post-production costs, including the costs to gather, market, treat, separate and transport the gas to market, can be considered in calculating a lessor’s royalty payment. There are two general approaches to the treatment of post-production costs in making royalty payments and the jurisdictions that have considered the issue are split. The majority of jurisdictions that have addressed the issue, including Texas and Pennsylvania,1 apply the “at the well” rule. The “at the well” rule allows for deduction of post-production costs prior to payment of royalties. “At the well” refers to the gas in its natural state at the point of extraction, before any treatment or transportation. When

1 Kentucky, North Dakota, California, New Mexico, Michigan, and Mississippi also follow some version of this rule. gas is processed or transported before the point of sale, the “at the well” price is determined by the net-back method. Under the net-back method, “value at the point of valuation is determined by taking the downstream sales price and deducting from it the costs incurred by the working interest owner … to move the gas from the point of valuation to the actual point of sale.”2 In

“at the well” jurisdictions, both lessors and lessees share proportionately in both the costs and benefits of post-production activities. Post-production cost deductions are generally permitted in these jurisdictions where the oil and gas lease at issue contains language referencing post- production costs or language referencing “at the well” or “at the wellhead.”

A minority of jurisdictions3 that have ruled on post-production cost deductions have applied the marketable product doctrine. These jurisdictions still consider a lessor’s royalty under a lease to be their cost-free share of production, but production “is understood not simply as the initial capture of the raw material, but in light of the lessee’s implied duty to market the captured materials, is instead thought of as extending to the production of a ‘marketable product.”4 Therefore, in jurisdictions applying the marketable product doctrine, if a lease is silent as to allocation of costs, the implied covenant to market obligates the lessee to incur costs necessary to render the gas marketable.5 After the gas is considered marketable, however, post-

2 Bruce M. Kramer, Royalty Interests in the United States: Not Cut from the Same Cloth, 29 Tulsa L. Rev. 449, 461 (1994). See also 30 C.F.R. § 206.101 (“‘Netback method’ (or workback method) means a method for calculating market value of oil at the lease. Under this method, costs of transportation, processing, or manufacturing are deducted from the proceeds received for the oil and any extracted, processed, or manufactured products, or from the value of the oil or any extracted, processed, or manufactured products at the first point at which reasonable values for any such products may be determined by a sale pursuant to an arm's-length contract or comparison to other sales of such products, to ascertain value at the lease.”). 3 Colorado, Oklahoma, Kansas, and Arkansas all follow some version of this rule. 4 Baker et al. v. Magnum Hunter Production, Inc., Case No. 2013-SC-000497, (Ky. August 20, 2015) (citing Rachel M. Kirk, Variations in the Marketable Product Rule from State to State, 60 Okla. L. R. 769 (2007). 5 See Williams & Meyers, Manual of Oil and Gas Terms.

-2- production costs may be deducted. In jurisdictions applying the marketable product doctrine, courts will generally only allow deductions after the gas is in a marketable condition where leases contain language such as “gross proceeds received at the well,” “market price at the well,”

“proceeds at the well,” and “market value at the well.6” West Virginia applies the “point of sale” approach, an extreme version of the marketable product doctrine, under which no post- production costs between the wellhead and the point of sale may be deducted from the royalty.7

In West Virginia, deductions are permitted only if the oil and gas lease at issue specifically identifies the deductions and the method for calculating those deductions.

Recent cases suggest the continued dominance of the “at the well” rule, and a rejection of attempts to extend the current reach of the marketable product doctrine. The Supreme Court of

Kentucky affirmed that state’s status as an “at the well” jurisdiction. The Kansas Supreme Court limited the application of the marketable product doctrine, traditionally applied in that state, by holding that the duty to make gas marketable is satisfied when the operator delivers the gas to the purchaser in a condition acceptable to the purchaser in a good faith transaction. The Supreme

Court of Ohio is currently considering the issue. Meanwhile, the Supreme Court of Texas issued a decision which emphasizes that both the “at the well” and the marketable product rules can be modified by lease language which expressly governs apportionment of certain post-production costs.

A. State High Court Confirms Kentucky is an “At The Well” Jurisdiction.

6 See e.g. Rogers v. Westerman Farm Co., 29 P.2d 887 (Colo. 2001); Wood v. TXO Prod. Corp., 854 P.2d 880 (Okla. 1992). 7 Estate of Tawney v. Columbia Natural Resources, LLC, 633 S.E.2d 22 (W. Va. 2006).

-3- In Baker v. Magnum Hunter Production,8 the Supreme Court of Kentucky confirmed that absent language to the contrary, a royalty in an oil and gas lease is based on the value of the raw gas captured at the well. The Plaintiff-lessors in the case had argued that Lessees had improperly deducted costs for gathering, compression, and treatment of gas. Plaintiffs’ leases provided that they were entitled to receive royalties of “one-eighth of the market price at the well for gas sold or for the gas so used from each well off the premises.” They argued that under Kentucky law, the provision required their royalty to be calculated based on the sale of gas made “marketable,” after accumulating, compressing, and treating the gas. Plaintiffs did acknowledge that bona fide transportation costs were proper deductions. As part of their case, Plaintiffs challenged the

Sixth Circuit’s recent characterization of Kentucky as an “at the well” jurisdiction.9 The

Kentucky Supreme Court disagreed, and held that under established Kentucky law, an oil and gas royalty is the lessor’s cost-free share of production, with “production” understood as the raw gas captured at the well.

The court rejected plaintiffs’ assertion that because prior Kentucky cases involving post- production costs had only specifically considered transportation costs, some variation of the marketable product doctrine was consistent with Kentucky law. The court held that the implied duty to market the gas did not extend beyond “selling the gas at a reasonable price at the well side,” and a reasonable well-side price could be determined by an actual well-side sale, by comparable sales in the vicinity, or by applying the net-back method to deduct downstream costs.

Finally, the court rejected the plaintiffs’ argument that the word “market” in “market price at the well” required the gas to be marketable before royalties were calculated. The court found that

8 Baker et al. v. Magnum Hunter Production, Inc., Case No. 2013-SC-000497, (Ky. August 20, 2015). 9 Poplar Creek Dev. Co. v. Chesapeake Appalachia, L.L.C., 636 F.3d 235 (6th Cir.).

-4- “without more specificity,” those words could not overcome the presumption that the royalty be based on the value of proceeds of the raw gas produced at the well. The court characterized the

“at the well” approach as “not only long-standing but also fair in every sense,” and pointed out that under the marketable product approach, the landowner actually receives more than one- eighth of the value of the raw gas produced from their property.

B. Kansas Supreme Court Weakens Marketable Product Doctrine.

In Fawcett v. Oil Producers, Inc. of Kansas,10 plaintiff royalty owners brought a class action against Oil Producers, Inc., of Kansas (“OPIK”), on behalf of all royalty owners who were paid royalties, claiming underpayment. The District Court granted class certification and granted plaintiffs partial summary judgment on the ground that OPIK impermissibly reduced plaintiffs’ royalty payments by charging certain processing and transportation fees. Oil Producers filed an interlocutory appeal. The Court of Appeals affirmed.

The crux of the issue was whether the operator could take into account the deductions and adjustments identified in third-party purchase agreements when calculating royalties. The leases at issue provided that royalties were based on the “proceeds” of the sale of gas and were silent as to deductions. The third-party purchasers paid OPIK for the raw gas received at the wellhead based on a percentage of specified index prices or the third-party purchasers’ actual revenue when that gas is sold to others, reduced by certain costs. For example, under OPIK’s contract with third-party purchaser ONEOK Midstream Gas Supply, L.L.C., in exchange for natural gas delivered by OPIK, ONEOK agreed to pay a percentage of its income from the sale of the natural gas and the natural gas liquids recovered from the raw gas—less deductions from the natural gas income for: a “base gathering and compression fee” of 55 cents per MMBtu;

10 Fawcett v. Oil Producers, Inc. of Kansas, 2015 WL 4033549 (Kan. July 2, 2015).

-5- approximately 6 percent for plant, gathering, and compression fuel; 1.14 percent for fuel lost and unaccounted for; and, if applicable, fees paid to others to deliver the gas to ONEOK’s processing facility. OPIK and ONEOK further agreed the amount due under this formula constituted full consideration for the gas and all of its constituents received at the wellhead by ONEOK. Title to the gas passed to ONEOK at or near the wellhead.

Lessors argued that the wellhead sale to an unaffiliated gatherer should be ignored in calculating royalties and that the gatherer’s resale price at the plant without deduction of the gatherer’s processing and transportation fees should be the basis for the royalty. Lessors invoked the “marketable condition rule” or “marketable product rule,” for the principle that the operators were responsible to make the gas marketable at their own expense. The lessors argued that the gas was not marketable until it entered an interstate pipeline, so the royalties in treating and transporting the gas up to that point could not be deducted. OPIK countered that it fulfilled its duty to market by entering into the third party purchase agreements for sale of the gas at the wellhead and argued that the third party agreements benefitted royalty owners because they were able to share in higher prices received for the gas sold closer to the consumer.

The Supreme Court of Kansas reviewed its applicable caselaw on the subject and determined that when gas is sold at the well it has been marketed and when the operator is required to pay a royalty on its proceeds from such sales, the operator may not deduct any pre- sale expenses required to make the gas acceptable to the third-party purchaser. The Court distinguished post-production costs, however, stating that “post-sale, post-production expenses to fractionate raw natural gas into its various valuable components or transform it into interstate pipeline quality gas are different than expenses of drilling and equipping the well or delivering the gas to the purchaser.” In so finding, the court expressly rejected the Colorado Supreme

-6- Court’s holding in Rogers v. Westerman Farm Co.,11 that, based on the operator’s duty to market, an operator can be solely responsible for post-production, post-sale processing expenses when the lease requires royalties to be calculated on the operator’s proceeds from the sale of gas at the well.

The Supreme Court of Kansas held that “when a lease provides for royalties based on a share of proceeds from the sale of gas at the well, and the gas is sold at the well, the operator’s duty to bear the expense of making the gas marketable does not, as a matter of law, extend beyond that geographical point to post-sale expenses. In other words, the duty to make gas marketable is satisfied when the operator delivers the gas to the purchaser in a condition acceptable to the purchaser in a good faith transaction.” Finally, the court acknowledged that there could be potential “claims for mischief” given that their finding leaves operators with nearly unilateral control over production and marketing, but qualified that the interest of royalty owners are protected by the covenant of good faith and fair dealing and the implied duty to market.

C. Ohio Supreme Court Accepts Key Certified Question Regarding Post- Production Costs.

In a putative class action pending in the Northern District of Ohio, Lutz v. Chesapeake

Appalachia L.L.C.,12 the plaintiffs claim they were underpaid royalties beginning in 1993. In

2010, the District Court dismissed the plaintiffs’ complaint as barred by the applicable four year statute of limitations because certain claims accrued in 1993 and the remaining claims accrued in

2000. In May of 2013, the Sixth Circuit Court of Appeals reversed and remanded, holding that because the leases at issue are divisible contracts, the four year statute of limitations is triggered

11 Rogers v. Westerman Farm Co., 29 P.3d 887, 891 n. 1, 912–13 (Colo.2001). 12 Lutz v. Chesapeake Appalachia L.L.C., Case No. 4:09-cv-02256 (N.D. Ohio).

-7- by each monthly royalty payment. The Sixth Circuit also remanded the issue of whether plaintiffs were permitted to go back further than the four years under the doctrine of fraudulent concealment because plaintiffs claim the original lessee fraudulently concealed allegedly improper deductions and royalty calculations.

The plaintiffs claim they were not paid royalties on gas lost between the wellhead and point of sale and that royalties were calculated based on long term sales contracts instead of current market values. On April 1, 2015, the U.S. District Court for the Northern District of

Ohio certified a question of law concerning the deduction of post-production costs to the

Supreme Court of Ohio. The question certified is as follows: “Does Ohio follow the “at the well” rule (which permits the deduction of post-production costs) or does it follow some version of the “marketable product” rule (which limits the deduction of post-production costs under certain circumstances)?” The Supreme Court of Ohio accepted review of the issue in June of

2015.

D. Supreme Court of Kentucky Holds Severance Tax Not Deductible as a Post- Production Cost.

In Appalachian Land Company v. EQT Production Company,13 the Supreme Court of

Kentucky considered whether the cost of a state severance tax could be deducted as a post- production cost from a lessor’s royalties. The issue arose out of a class action originally filed in the U.S. District Court for the Eastern District of Kentucky, wherein the plaintiffs had deducted post-production costs including processing, transportation, and all severance taxes. The district court certified the following question to the Supreme Court of Kentucky:

“Does Kentucky’s ‘at-the-well’ rule allow a natural-gas processor to deduct all severance taxes paid at market prior to calculating a contractual royalty payment

13 Appalachian Land Co. v. EQT Production Co., Case No. 2013-SC-000598, (Ky. August 20, 2015).

-8- based on ‘the market price of gas at the well,’ or does the resource’s at-the-well price include a proportionate share of the severance taxes owed such that a processor may deduct only that portion of the severance taxes attributable to the gathering, compression and treatment of the resource prior to calculating the appropriate royalty payment?”

The majority declined to accept either proposition, and instead held that absent a specific lease provision apportioning severance taxes, a lessee may not deduct any portion of severance taxes prior to calculating royalties.

The majority reviewed prior cases, and held that the tax was intended to burden the business of extracting minerals, and not the land containing the minerals. The majority also distinguished Kentucky’s severance tax statute from those of other states which specifically provide for the payment of severance taxes by the royalty owner. The majority pointed out that “while the sale of the gas is contingent upon payment of the severance tax, the tax does not enhance the value of the gas.” The court found “it would run contrary to the parties’ intent – and the purpose of the ‘at the well’ rule – for the royalty owner to share in an expense that does nothing to improve the quality of the product beyond the well-head.” The court acknowledged that tax policy is a legislative concern, and the legislature has the ability to modify the statute if necessary. Two dissenting justices would have found that the portion of severance taxes attributable to processing of gas after extraction could be properly deducted from royalties.

E. Texas High Court Applies “Cost Free” Language to Post-Production Costs.

-9- In Chesapeake Exploration, L.L.C. v. Hyder,14 the Texas Supreme Court narrowly ruled in favor of lessors in the interpretation of a specific provision governing deductions from an overriding royalty in a lease. The court considered the meaning of language providing that the lessor received a “perpetual, cost-free (except only its portion of production taxes) overriding royalty of 5 percent of gross production obtained” from drilling sites on the Hyders’ property.

Chesapeake argued that because of the “gross production” language in the provision, the royalty is only “cost free” to the point where the gas is extracted. Chesapeake argued the provision should not apply to activities beyond the wellhead, like treatment and transportation, which add value to the gas. Chesapeake argued that “cost-free overriding royalty” was merely a synonym for overriding royalty and cited a number of lease provisions discussed in other cases supporting that view.

The Hyders countered that the cost-free language was meant to indicate that there would be no deduction of post-production costs. They argued the requirement that the overriding royalty be “cost free” could only refer to postproduction costs, because the royalty is free of production costs without saying so. The Hyders also argued they should not bear post- production costs under the Lease because of a provision in the lease disclaiming the application of the Heritage Resources case, in which the Supreme Court of Texas held that a royalty is free of production expenses but “usually subject to post-production costs, including taxes ... and transportation costs.”15 The court in that case did qualify that “the parties may modify this general rule by agreement.”

14Chesapeake Exploration, L.L.C. v. Hyder, Case No. 14-0302, 2015 WL 3653446 (Tex. June 12, 2015). 15 Heritage Resources, Inc. v. Nationsbank, 939 S.W.2d 118, 121–122 (Tex. 1996).

-10- After a bench trial, the trial court rendered judgment for the Hyders, awarding them

$575,359.90 in postproduction costs. The court of appeals affirmed and the Texas Supreme

Court granted Chesapeake’s petition for review. The Texas Supreme Court ruled in a 5-4 decision that post-production costs could not be deducted from the overriding royalty under the lease. A majority of the Justices found that the language “cost-free,” in the overriding royalty provision, though not as clear as language in a separate royalty provision in the Lease, was

“reasonably interpreted” to exempt the overriding royalty from postproduction costs. The majority also pointed out that the disputed clause excepts production taxes, which are often considered postproduction expenses, from the “cost-free” designation.

Justice Brown, writing for the dissent, stated that he would have held the “cost-free” designation should not operate to add value to the Hyders’ overriding royalty, and disagreed with the majority that such language “expresses an intent to abrogate the default rule that the lessee bears post-production costs.” Justice Brown stated that “it may be true that we have, on occasion, generally categorized taxes as a post-production cost. But, as the Court recognizes, parties often allocate tax liability on the royalty owner while at the same time specifically emphasizing that the royalty is free from production costs.” Furthermore, while the language in the provision governing the overriding royalty interest was merely “cost-free,” a separate royalty provision was specified as being: “free and clear of all production and post-production costs and expenses, including but not limited to, production, gathering, separating, storing, dehydrating, compressing, transporting, processing, treating, marketing, delivering or any other costs and expenses incurred between the wellhead and Lessee’s point of delivery or sale of such share to a third party.” The dissent found the difference in the provisions highlighted the fact that the

“cost-free” language was not intended to apply to post-production costs. The dissent ultimately

-11- read the overriding-royalty clause as granting the Hyders a percentage of production before post- production value was added.

While the application of the Hyder case to other royalty disputes may be limited as a result of the specific lease language interpreted in the case, the Texas Supreme Court’s discussion of Heritage Resources may be of interest to producers. The majority noted that the disclaimer of the Heritage Resources case in the Lease did not influence their decision, but they did state that “Heritage Resources does not suggest, much less hold, that a royalty cannot be made free of postproduction costs. Heritage Resources holds only that the effect of a lease is governed by a fair reading of its text. A disclaimer of that holding, like the one in this case, cannot free a royalty of postproduction costs when the text of the lease itself does not do so.”

F. Update on Post-Production Cost Cases in Pennsylvania State and Federal Courts.

On March 5, 2015 a jury found in favor of a class of plaintiff lessors against Defendant

Energy Corporation of America, on claims that ECA had improperly deducted interstate pipeline costs and marketing expenses from their royalties. The court denied ECA’s post-trial motions, concluding extended litigation of the matter in the Western District of Pennsylvania.16 Pollock was one of the first significant post-Kilmer class action royalty challenges in Pennsylvania.

Plaintiffs raised multiple issues regarding underpayment of royalties, and argued that: ECA did not pay royalties on gas that was lost between the well and point of sale, ECA did not pay royalties on gas used before the point of sale, ECA deducted post-production costs not expressly permitted by the leases and allocated post-production costs on a pro rata basis, and ECA calculated royalties on sales price instead of the price paid.

In January of 2013, District Judge Conti granted summary judgment in favor of

16 Pollock v. Energy Corp. of Am., 2015 WL 3795659 (W.D. Pa. June 18, 2015).

-12- ECA on plaintiffs’ claims that ECA’s allocation method was improper, that deductions for marketing and dehydration and compression of gas were improper, and that plaintiffs were entitled to royalties on proceeds from hedging transactions by ECA.17 In rejecting plaintiffs’ claim regarding ECA’s allocation method, the court endorsed the allocation of post-production costs on a pro rata basis. This settled an issue of first impression in Pennsylvania, and followed industry custom and practice. In September of 2013, the court adopted the Magistrate’s recommendation that two classes be certified in the case – one of lessors who alleged that post- production cost deductions were improperly taken related to transportation and one of lessors who alleged improper marketing costs involving an affiliate.18 In July of 2015, ECA appealed the verdict to the Third Circuit Court of Appeals.

In Hall v. CNX Gas Company,19 the plaintiffs brought an action in the Court of Common

Pleas of Allegheny County, and argued that the court should reverse its holding on allocation of post-production costs in a similar case – Lawrence, et al., vs. Atlas Resources, Inc., et al.20 In

Lawrence, the court had held that where leases were silent on the issue of allocation, the lessor was permitted to allocate post-production costs on a pro-rata basis rather than calculate the costs per well. The courts’ reasoning differed from Pollock in that instead of relying on industry custom, the court held that the pro-rata allocation of post-production costs met the expectations of the parties under “community standards of fairness and policy.”

17 Pollock v. Energy Corp. of Am., 2013 WL 275327 (W.D. Pa. Jan. 24, 2013). 18 Pollock v. Energy Corp. of Am., 2013 WL 5338009 (W.D. Pa. Sept. 16, 2013) report and recommendation adopted, CIV.A. 10-1553, 2013 WL 5491736 (W.D. Pa. Sept. 30, 2013). 19 Earl D. Hall, Sr.; Betty Jane Hall; Earl D. Hall, Jr.; on behalf of themselves and all others similarly situated, v. CNX Gas Company, LLC, No. GD 10-21633 (Ct. Com. Pl. Allegheny Cnty.). 20 Lawrence, et al., vs. Atlas Resources, Inc., et al., No. GD-10-011904 (Ct. Com. Pl. Allegheny Cnty.).

-13- The plaintiffs in Hall brought similar claims to those raised by the plaintiffs in Pollock and Lawrence, and argued that deductions of lost and used gas based on allocation of post- production costs breached the leases. The court granted the defendants’ motion for summary judgment on the grounds that there were no material factual differences of fact between

Lawrence and Hall. The Plaintiffs in Hall subsequently appealed the case to the Pennsylvania

Superior Court. Oral argument in the case is scheduled for September 17, 2015.

G. Texas Court Considers Treatment of Casinghead Gas a Post-Production Cost.

In French v. Occidental Permian, Ltd.,21 the Texas Supreme Court overturned a $10 million judgement and held that the costs of processing casinghead gas resulting in part from

CO2 injection were properly deducted from Plaintiffs’ royalties. Because production at the wells at issue had substantially declined, operator Occidental Permian injected large amounts of CO2 into the field in an effort to enhance recovery. The injection of CO2 significantly improved production but resulted in the production of CO2-laden casinghead gas. Occidental processed the gas to (1) remove the CO2 and other contaminants for reinjection into the reservoir and (2) extract the natural gas liquids for sale. After describing that a royalty is generally “free of the expenses of production [but] subject to postproduction costs, including . . . treatment costs to render [production] marketable…,” the court noted that the dispute hinged on whether the removal of CO2 from the casinghead gas was a production or post-production cost. The court found that Occidental could have reinjected all of the casinghead gas produced, but performed further processing for the benefit of both parties. “French, having given Oxy the right and discretion to decide whether to reinject or process the casinghead gas and having benefitted from

21 French v. Occidental Permian, Ltd., 440 S.W.3d 1, 3 (Tex. 2014), reh’g denied (Oct. 3, 2014).

-14- that decision, must share in the cost of CO2 removal.” This case is noteworthy in that the court emphasized the benefits of the enhanced recovery method at issue to both the lessors and lessees.

§XX.02. Other Recent Cases Involving Royalty Disputes.

A. Failure to Join Lessors Impacted by Suit Results in Dismissal.

In Crawford v. XTO Energy Inc,22 plaintiff Richard Crawford brought an action for conversion, breach of the lease, declaratory judgment, and to quiet title to a strip of land which was placed in a unit operated by XTO. XTO had ceased paying royalties to Crawford, and instead paid adjacent landowners, as a result of a title opinion stating that Crawford lacked an interest in the subject tract under Texas’ strip and gore doctrine. The trial court judge ordered the joinder of the adjacent landowners in the unit, and dismissed the case when Crawford failed to join those parties. On appeal, the majority held that the trial judge did not abuse his discretion in dismissing the suit against XTO. The majority held that “the inescapable conclusion is that either the nonjoined adjacent landowners will not be bound by the trial court’s ultimate decision on the declaratory judgment portion of Crawford’s suit, or the nonjoined adjacent landowners could lose some of their royalty payments. … In either scenario, a fact pattern is presented that would support the joinder of the adjacent landowners.”

B. RICO Suit in Pennsylvania Survives Motion to Dismiss.

In June of 2014, Plaintiffs brought a putative class action against Chesapeake Energy and

Access Midstream Partners in The Suessenbach Family Limited Partnership et. al v. Access

Midstream Partners,23 alleging RICO violations and mail fraud, along with claims for honest services fraud, unjust enrichment, conversion, and civil conspiracy. The claims are based on

22 Crawford v. XTO Energy Inc., 455 S.W.3d 245 (Tex Ct. App. 2015). 23 The Suessenbach Family Limited Partnershi et. al v. Access Midstream Partners, L.P. et. al, Case No. 3:14-cv-01197 (M.D. Pa. Jun 20, 2014).

-15- Plaintiffs’ allegation that Chesapeake Energy formed the affiliate entity Access Midstream

Partners, and subsequently sold its midstream assets to Access Midstream in order to fund

Chesapeake’s ongoing operations. Plaintiffs’ complaint alleges close and continuing ties between Chesapeake Energy and Access Midstream, and alleges that the two companies were not operating at an arm’s length. Plaintiffs allege that Chesapeake Energy and Access

Midstream entered into agreements in which Chesapeake Energy’s subsidiaries agreed to pay

Access Midstream inflated rates for natural gas gathering and transportation services, including intrastate transport, in part to pay back Access Midstream for what they characterize as “off- balance sheet loans.”

Plaintiffs allege that, as a result, between October 2012 and January 2014, deductions of greater than the statutory minimum 12% were deducted from their royalty payments. On

August 26, 2014, Chesapeake Energy and Access Midstream filed separate motions to dismiss.

In its motion, Chesapeake argued that plaintiffs failed to allege injury because the gathering rate deducted from royalties did not increase after the defendants entered into the subject agreements in 2012. Chesapeake further argued that the source of plaintiffs’ claimed injury – the 2012 agreements between Chesapeake Energy and Access Midstream - was not related to the mailing of royalty stubs, which Plaintiffs relied upon for their mail fraud and RICO claims.

In evaluating the motions to dismiss, the court found that Plaintiffs’ allegations that their deductions had jumped from 24% in October of 2013 to 39% in January of 2014, as well as statements from analysts unable to explain the increase, were sufficient for the majority of

Plaintiffs’ claims to survive dismissal. The court found that plaintiffs’ allegation that the royalty stubs were designed to lull them into a belief that there was no fraud was sufficient support for the RICO claim to avoid dismissal. The court found that the mailings themselves were

-16- fraudulent in that they contained inflated fees. The court also rejected Chesapeake’s gist of the action defense, on the grounds that it was too early to determine whether the gist of the action lay in contract or in tort. The court dismissed Plaintiffs “honest services” fraud claim, finding that plaintiffs did not sufficiently allege a fiduciary duty existed between them and defendants.

In two similar cases, A & B Campbell Family et al v. Chesapeake Energy Corporation et. al,24 and Brown v. Access Midstream Partners, L.P. et. al,25 the plaintiffs have also brought claims, including RICO actions, against Chesapeake Energy and Access Midstream arising out of the 2012 agreements between the two entities. Chesapeake had filed a motion to dismiss in

A&B Campbell, but the Plaintiffs amended their complaint on July 18, 2015. The defendants in

Brown have filed motions to dismiss, which are pending.

C. Flaring Class Actions Not Proper Before Exhaustion of North Dakota State Administrative Remedies.

Three putative class actions were brought in state court and removed to the U.S. District

Court for the district of North Dakota in November of 2013: Sorenson et al. v. Burlington

Resources Oil & Gas Co. LP,26 Wisdahl v. XTO Energy Inc,27 and Border Farm Trust v. Samson

Resources Co.28 Plaintiffs brought claims seeking royalties due for gas flared, alleging violations of state statutes as well as common law claims of waste and conversion. North Dakota law permits flaring for a one-year period from the date that a well commences production, but prohibits the practice thereafter. Defendants moved to dismiss on the grounds that Plaintiffs had

24 A & B Campbell Family et al v. Chesapeake Energy Corporation et. al, Case No. 3:15-cv- 00340 (M.D. Pa. Feb 17, 2015). 25 Brown v. Access Midstream Partners, L.P. et. al, Case No. 3:14-cv-00591 (M.D. Pa. Mar 28, 2014). 26 Sorenson et al. v. Burlington Resources Oil & Gas Co. LP, Case No. 4:13-cv-00132, (D. ND. May 14, 2014). 27 Wisdahl v. XTO Energy Inc., Case No. 4:13-cv-00136, (D. ND. May 14, 2014). 28 Border Farm Trust v. Samson Resources Co., Case No. 4:13-cv-00141, (D. ND. May 14, 2014).

-17- failed to exhaust their administrative remedies. The court agreed, and dismissed the actions on the grounds that the production of oil and gas in North Dakota are governed by the Act for the

Control of Gas and Oil Resources, which granted the North Dakota Industrial Commission “very broad authority to regulate and administer oil and gas related activities in the state of North

Dakota.” The court held that Plaintiffs’ proper remedy was to file a petition with the North

Dakota Industrial Commission. The court also dismissed the waste and conversion claims on the grounds that they were preempted by the North Dakota statute governing flared gas.

D. U.S. Supreme Court Clarifies Standard for Pleading Amount in Controversy.

In Dart Cherokee Basin Operating Co. v. Owens,29 plaintiff Brandon Owens filed a putative class action in Kansas state court alleging that defendants Dart Cherokee Basin

Operating Company, and Cherokee Basin Pipeline, underpaid royalties owed to the putative class members. The complaint sought a “fair and reasonable amount” to compensate the putative class members for damages allegedly sustained. Dart Cherokee invoked federal jurisdiction under the

Class Action Fairness Act of 2005 (CAFA) and removed the case to the U.S. District Court for the District of Kansas. One requirement for removal under CAFA is that the amount in controversy must exceed $5 million. In its notice of removal, Dart Cherokee stated that

Plaintiffs’ alleged damages totaled more than $8.2 million. Plaintiffs moved to remand the case on the grounds that Dart Cherokee provided “no evidence” in their notice of removal for the $8.2 million figure, and thus did not adequately support their burden to prove that the amount in controversy exceeded the jurisdictional minimum. The district court agreed and remanded the case. The US Supreme Court granted Dart Cherokee’s petition for certiorari to decide the degree

29 Dart Cherokee Basin Operating Co. v. Owens, 135 S. Ct. 547, 551 (2014).

-18- of support required for a party pleading amount in controversy in a notice of removal under

CAFA.

The Court held that the district court had improperly relied on a “presumption against removal” that should not have applied to a party removing under CAFA. The Court also held that when a defendant seeks federal court jurisdiction, their amount in controversy allegation should be accepted in good faith. It is only after a plaintiff has contested the amount in controversy that the court should weigh the evidence submitted. In that case, removal will be considered proper if the district court finds by a preponderance of the evidence that the amount in controversy exceeds the jurisdictional threshold.

§XX.03. Conclusion.

Cases involving the calculation and payments of royalties will undoubtedly continue so long as royalties are being paid, but cases such as the recent ones described above help to better define what can be included in royalty calculations and when claims can be made. Hopefully, this guidance will help producers and royalty owners better handle disputes going forward.

-19- ϴͬϮϴͬϮϬϭϱ

Recent Developments in Royalty Litigation

Nicolle R. Snyder Bagnell Kevin C. Abbott

Introduction

Recent Cases Involving Post-Production Costs • “At the Well” Rule vs. Marketable Product Doctrine • Which costs qualify as post-production costs? • How may costs be allocated?

Other Cases Involving Royalties • RICO Actions • Flaring Suit • Procedural Rulings

ϭ ϴͬϮϴͬϮϬϭϱ

“At the Well” Rule

• The “at the well” rule allows for deduction of post-production costs prior to payment of royalties.

• “At the well” refers to the gas in its natural state at the point of extraction, before any treatment or transportation.

• Pennsylvania, Texas, Kentucky, North Dakota, California, New Mexico, Michigan, and Mississippi all follow some version of this rule.

Marketable Product Doctrine

• In jurisdictions applying this rule, if a lease is silent as to allocation of costs, the implied covenant to market obligates the lessee to incur costs necessary to render the gas marketable. • Colorado, Oklahoma, Kansas, and Arkansas follow some version of this rule. • West Virginia applies the “point of sale” approach, an extreme version of the marketable product doctrine, under which no post-production costs between the wellhead and the point of sale may be deducted from the royalty.

Ϯ ϴͬϮϴͬϮϬϭϱ

“At the Well” vs. Marketable Product: Recent Cases

• Baker et al. v. Magnum Hunter Production, Inc., Case No. 2013-SC-000497, (Ky. August 20, 2015).

• Fawcett v. Oil Producers, Inc. of Kansas, 2015 WL 4033549 (Kan. July 2, 2015).

Deduction of Certain Post-Production Costs

• Appalachian Land Co. v. EQT Production Co., Case No. 2013-SC-000598, (Ky. August 20, 2015)

• French v. Occidental Permian, Ltd., 440 S.W.3d 1, 3 (Tex. 2014), reh’g denied (Oct. 3, 2014).

ϯ ϴͬϮϴͬϮϬϭϱ

Texas High Court Applies “Cost Free” Language to Post-Production Costs

• Chesapeake Exploration, L.L.C. v. Hyder, Case No. 14-0302, 2015 WL 3653446 (Tex. June 12, 2015).

RICO Suit in Pennsylvania Survives Motion to Dismiss

• The Suessenbach Family Limited Partnershi et. al v. Access Midstream Partners, L.P. et. al, Case No. 3:14-cv-01197 (M.D. Pa. Jun 20, 2014).

• A & B Campbell Family et al v. Chesapeake Energy Corporation et. al, Case No. 3:15-cv-00340 (M.D. Pa. Feb 17, 2015).

• Brown v. Access Midstream Partners, L.P. et. al, Case No. 3:14-cv-00591 (M.D. Pa. Mar 28, 2014).

ϰ ϴͬϮϴͬϮϬϭϱ

Flaring Class Actions Not Proper Before Exhaustion of North Dakota State Administrative Remedies

• Wisdahl v. XTO Energy Inc., Case No. 4:13-cv-00136, (D. ND. May 14, 2014).

• Sorenson et al. v. Burlington Resources Oil & Gas Co. LP, Case No. 4:13-cv-00132, (D. ND. May 14, 2014).

• Border Farm Trust v. Samson Resources Co., Case No. 4:13- cv-00141, (D. ND. May 14, 2014).

U.S. Supreme Court Clarifies Standard for Pleading Amount in Controversy

• Dart Cherokee Basin Operating Co. v. Owens, 135 S. Ct. 547, 551 (2014).

ϱ ϴͬϮϴͬϮϬϭϱ

Failure to Join Lessors Impacted by Suit Results in Dismissal

• Crawford v. XTO Energy Inc., 455 S.W.3d 245 (Tex Ct. App. 2015).

Update on Pending Pennsylvania Post-Production Cost Cases

• Pollock v. Energy Corp. of Am., 2015 WL 3795659 (W.D. Pa. June 18, 2015).

• Earl D. Hall, Sr.; Betty Jane Hall; Earl D. Hall, Jr.; on behalf of themselves and all others similarly situated, v. CNX Gas Company, LLC, No. GD 10-21633 (Ct. Com. Pl. Allegheny Cnty.).

ϲ ϴͬϮϴͬϮϬϭϱ

Update on Ohio Post-Production Cost Cases

• Lutz, et al. v. Chesapeake Appalachia L.L.C., Case No. 4:09- cv-2256 (N.D. Ohio), certified question accepted, 2015-0545 (Ohio June 3, 2015).

Conclusion

• Continued Dominance of “At the Well” Rule.

• Decisions will continue to provide guidance as to what costs can be included in royalty calculations.

• Questions?

ϳ Kevin Abbott – Reed Smith LLP

Kevin is a partner in the Energy & Natural Resources Group. He focuses his work in energy litigation and oil and gas law. He has more than 30 years of experience in representing clients in the oil and gas industry, natural gas exploration and production companies, interstate pipeline companies and utilities. Kevin is currently advising natural gas exploration and production companies on issues related to exploration of Marcellus and Utica shales. He is admitted to practice in all state and federal courts in Pennsylvania, Ohio and West Virginia.

Kevin was lead counsel in winning a series of cases confirming the right to extend leases under the original payment terms, defeating class action claims seeking royalties on gas lost before the point of sale, royalties on hedging, and claims as to the allocation of post-production costs. He represented Pennsylvania’s industry groups in the leading Pennsylvania Supreme Court case on post-production costs and is currently representing the lessee in the case in which the Ohio Supreme Court will decide as to the proper treatment of post-production costs. Kevin is also representing lessees before the Ohio Supreme Court in a class action in which lessors claim that their leases are perpetual leases that are void as against public policy and in cases involving the interpretation of Ohio’s Dormant Mineral Act.

Kevin is the recipient of the Pittsburgh Business Times’ Energy Leadership Award and has been recognized in its “Who’s Who in Energy” list. He has been recognized as a Top Rated Lawyer in Energy/Environmental Law by American Lawyer Media and Martindale-Hubbell™. Kevin has also been listed in Pennsylvania Super Lawyers in the energy field in every year since 2004, and in Super Lawyers Business Edition in the area of Energy & Natural Resources.

Kevin teaches oil and gas law at the University of Pittsburgh School of Law. In 2015, he was named by the University as the interim Executive Director of its Energy Law and Policy Institute.

US_ACTIVE-123403507.1-KCABBOTT 08/27/2015 12:44 PM Emery Gullickson Richards Associate Norton Rose Fulbright US LLP Houston

T:+1 713 651 3649 F:+1 713 651 5246 vCard (+Outlook) [email protected]

Related services

Antitrust and competition Dispute resolution and litigation Energy disputes White collar crime Government investigations

Emery Richards joined Norton Rose Fulbright in 2014. She focuses her practice on antitrust, white collar crime, and energy litigation. As an associate, she has worked on class actions, antitrust lawsuits, a two-week trial, and commercial disputes. Emery has also helped develop compliance training programs. During law school, Emery spent a year as a visiting student at the University of Houston Law Center and served as a Field Reports Editor for the Columbia Journal of Environmental Law.

Emery is admitted before the Texas bar, the U.S. Court of Appeals for the Fifth Circuit, and the U.S. District Courts for the Southern, Northern, Western, and Eastern Districts of Texas.

Education 2014 - J.D., Columbia Law School 2008 - B.A., cum laude, English, Sociology, Rice University

Publications Barclay R. Nicholson and Emery Gullickson Richards "Induced Earthquakes Shake Up Regulatory and Litigation Landscape," The Energy Law Advisor, August 2015 Dave Navetta, Utsav Mathur, and Emery Gullickson Richards, "SCOTUS mulls 'no- injury' privacy class actions," Intellectual Property Magazine, June 2015 Barclay R. Nicholson and Emery Gullickson Richards, "Induced Seismicity Legal Issues Break New Ground," Law360, May 15, 2015 Barclay R. Nicholson and Emery Gullickson Richards, "Earthquake research reverberates in Texas legislature," Texas Lawyer, May 7, 2015 Emery Gullickson Richards, "Finding fault: Induced earthquake liability and regulation," Columbia Journal of Environmental Law Field Reports, April 1, 2015 Carlos R. Rainer, Aubrey Joy Stock, and Emery Gullickson Richards, "Trade associations remain under FTC lens," Norton Rose Fulbright Client Update, January 2015

Licenses Texas State Bar License

Interests Emery enjoys cycling, reading, and spending time with her family and friends. Financial institutions Energy Infrastructure, mining and commodities Transport Technology and innovation Life sciences and healthcare

Analysis of Litigation Involving Shale & Hydraulic Fracturing

Barclay R. Nicholson, Partner Fulbright & Jaworski LLP June 1, 2014 TABLE OF CONTENTS

Pages Introduction 1-2

Litigation Involving Hydraulic Fracturing 2-43

Litigation Involving Earthquakes and Hydraulic Fracturing 44-46

Studies Concerning Possible Connections Between Earthquakes and Fracking 46-52

Litigation Concerning Municipal Bans of Hydraulic Fracturing 52-61

Litigation Concerning State vs. Local Zoning Regulation of Hydraulic Fracturing 61-66

Litigation Claiming Moratorium on Hydraulic Fracturing Affected Investment 66-67

Litigation Over Delays in Completing State Study of Hydraulic Fracturing 67-68

Litigation Concerning Restrictions for Drilling and Seismic Testing 68-70

Litigation Involving Oil & Gas Lease Disputes 70-84

Lawsuits Brought by Citizens, States, and Environmental Groups 84-94

Litigation Involving Conflict Between Mineral Owners 94

Litigation Involving Enforcement 94-95

Litigation Challenging Government Regulations 95-96

Litigation Challenging Disclosure Regulations 96-98

Litigation Involving Antitrust Issues 99

Litigation Between Operator and Service Company 99-100

Transport of Shale Oil by Rail 100-101

Settlements Involving Hydraulic Fracturing and Shale Drilling 102-103

Regulatory Investigations 103-104

Potential for Shareholder Litigation 104

Conclusion 104

About the Author 104

Appendix A: Table of Cases Appendix B: Resume of Barclay R. Nicholson

ANALYSIS OF LITIGATION INVOLVING SHALE & HYDRAULIC FRACTURING Barclay R. Nicholson1 June 1, 2014 Hydraulic fracturing involves the injection of highly pressurized fluids and proppants into shale or other non-porous hydrocarbon formations in order to increase production of oil and natural gas wells. Hydraulic fracturing utilizes large volumes of water; thus, it also produces large volumes of fluids called “flowback” or “produced water.” Most operators engaged in hydraulic fracturing dispose of their flowback or produced water by either treating and recycling the water, treating the water and disposing of it, or injecting the fluids into a well called a “Class II Well.”

Although hydraulic fracturing has been utilized in the United States for decades, within the past several years, hydraulic fracturing and its alleged impact on water quality have received increasing attention and scrutiny from the media, the U.S. Environmental Protection Agency (EPA), Congress, regulatory agencies throughout the United States, state and local governments, and various environmental groups. Many parties have raised concerns about the reduction of citizens’ water supplies due to the large volume of water used in the fracturing process, the alleged contamination of aquifers that supply drinking water, and the appropriate disposal of or recycling of the flowback or produced water. At the heart of these concerns are the additives used in fracturing fluids, which some argue contain potentially toxic substances such as benzene, toluene, xylene, methanol, formaldehyde, ethylene, glycol, glycol ethers, hydrochloric acid, and sodium hydroxide.

While lawmakers debate the need for policies and regulations, and environmental agencies prepare studies and conduct tests, the number of civil cases involving hydraulic fracturing is rising. Many of these lawsuits (some of which are class actions) that have been filed by landowners in Arkansas, Colorado, Louisiana, Ohio, New York, Pennsylvania, Texas, and West Virginia against oil and gas operating and drilling companies, allege contamination of groundwater or sources of drinking water. These landowners either leased oil and gas rights to the companies, or reside in close proximity to where hydraulic fracturing operations have been conducted. Other shale and hydraulic fracturing lawsuits concern earthquakes, environmental issues, regulatory enforcement, municipal bans, government regulations, and oil and gas lease disputes.

This article discusses many of the recently filed lawsuits2 that implicate hydraulic fracturing, and the claims made in those cases. The cases are listed by filing date from earliest to latest within

1 Barclay R. Nicholson, a partner at Fulbright & Jaworski L.L.P. (Norton Rose Fulbright), Houston, Texas, focuses his practice on energy and commercial disputes. He has significant experience in handling energy-related litigation and has represented some of the world’s major oil and gas producing and refining companies, as well as some of the nation’s biggest drilling and E&P companies. Barclay serves on the firm’s Shale and Hydraulic Fracturing Task Force and recently has authored numerous articles and given speeches both across the nation and internationally on this topic. Barclay also serves as the editor of www.frackingblog.com, a blog devoted to hydraulic fracturing.

1

each topic of discussion. Many of the cases are in the early stages of litigation, while others have been dismissed or settled. As of the date of this White Paper, the authors have not located any judgment against a well operator, drilling contractor, or service company for contamination of groundwater resulting from hydraulic fracturing.

Litigation Relating to Hydraulic Fracturing

Maring v. John Nalbone, Jr., Universal Resource Oil & Gas; EnerVest Operating LLC, and Dallas Morris Drilling Inc., No. K12009001499 (N.Y. Sup. Ct., Aug. 27, 2009)

In August 2009, Josephine Maring (“Plaintiff”) filed suit in Chautauqua County, New York against John Nalbone Jr., Universal Resource Oil & Gas, EnerVest Operating LLC, and Dallas Morris Drilling Inc. (collectively, “Defendants”). According to Plaintiff, Defendants own and operate approximately 20 natural gas wells within a two-mile radius of her property. Plaintiff alleges that Defendants’ drilling and extraction activities have resulted in the contamination of her water well with methane gas, making the water unfit for ordinary use.

The complaint includes causes of action for trespass, nuisance, and negligence. Plaintiff seeks damages in the amount of $250,000 plus litigation costs. Although the complaint states that Defendants’ gas drilling and extraction operations caused methane contamination, the complaint does not specifically mention hydraulic fracturing. While the Defendants appeared on September 19, 2011, there has been little activity in this case since that date.

Zimmermann v. Atlas America, LLC, No. 2009-7564 (Pa. Ct. Com. Pl., Sept. 21, 2009)

Zimmermann v. Atlas America, LLC was filed in Pennsylvania state court on September 21, 2009 against Atlas America, LLC (“Atlas”). Plaintiffs George and Lisa Zimmermann are a married couple owning only the surface rights to their property in Pennsylvania. After attempting to prevent Atlas from conducting drilling operations on their property, the Zimmermanns entered into a settlement agreement with Atlas. The claims of contamination in this lawsuit arose after that settlement and after drilling had commenced.

Plaintiffs, who agreed in the settlement agreement to permit Atlas to conduct hydraulic fracturing operations on their farm, allege that Atlas used toxic chemicals during the fracturing process, and that the use of such chemicals contaminated and polluted their freshwater aquifers. They claim that their natural water aquifers and their previously pristine Heirloom Tomato farmland were destroyed as a result of Atlas’s hydraulic fracturing operations. Plaintiffs assert claims for trespass, nuisance, negligence, negligence per se, res ipsa loquitur, fraud/misrepresentation, and

2 Information in this White Paper identifying plaintiffs, defendants, and causes of action comes from the docket sheets, complaints, petitions, motions, and orders filed in each lawsuit. Any information that is not included in the pleadings is footnoted or identified in this White Paper.

2

breach of the settlement agreement. They also allege that Atlas violated casing requirements of the Pennsylvania Oil & Gas Act.

For trespass, claiming that their surface rights extended to the aquifers below their property, Plaintiffs allege that Atlas contaminated their soil and water with carcinogens and other pollutants, and that this contamination went beyond any disturbance contemplated in the parties’ settlement agreement. In addition, Atlas used substantially more acreage than agreed upon in the settlement agreement. The petition includes assertions that the contamination of the land and water and the release of noxious and harmful detectable gases into the air constituted a private nuisance.

For negligence, Plaintiffs argue that Atlas breached its duty of care to operate its mining operations with due regard to the rights of the property’s surface estate, to use only so much of the property as reasonably necessary to conduct mining operations, and to conduct mining operations so as to leave the property intact. They assert that Atlas breached this duty by (1) not conducting its operations in a reasonable manner to protect their property; (2) failing to take proper precautions to prevent toxic and carcinogenic chemicals from escaping and damaging their property; (3) failing to take appropriate measures after discovering damage to the surface estate; (4) selecting well sites that were in close proximity to their home and natural water aquifers; and (5) employing hydraulic fracturing with the knowledge that it would cause the contamination to the surface estate.

In their fraud/misrepresentation claim, Plaintiffs state that prior to the commencement of drilling on their property, Atlas knew and should have disclosed that the chemicals injected into sub- surface reservoirs contained and/or would release hazardous contaminants into the soil and water.

On August 4, 2011, the Court dismissed the claims of res ipsa loquitur, gross negligence, and fraud/misrepresentation. The Court stated that it would reinstate the fraud/misrepresentation claim if Plaintiffs would re-plead to specifically state the existence of a duty and how that duty was breached.

Compensatory damages for permanent destruction of property, permanent destruction of water aquifers, loss of water well use, and reduction in value of property are sought. Plaintiffs also want punitive damages.

Fiorentino v. Cabot Oil & Gas Corp. and Gas Search Drilling Services Corp., No. 3:09-cv- 02284 (M.D. Pa., Nov. 19, 2009) (also known as Ely v. Cabot Oil & Corp., et al.)

A group of 44 residents in Susquehanna County, Pennsylvania (“Plaintiffs”) sued Cabot Oil & Gas Corporation (“Cabot”) and Gas Search Drilling Services Corporation (collectively, with Cabot, “Defendants”) for state law violations and common law claims, including negligence,

3

gross negligence,3 negligence per se, nuisance, strict liability, fraudulent misrepresentation, breach of contract, medical monitoring trust fund, and violation of the Pennsylvania Hazardous Sites Cleanup Act. According to Plaintiffs, Defendants, among other things, allegedly (1) released combustible gas into the headspaces of Plaintiffs’ water wells; (2) caused elevated levels of dissolved methane to be present in Plaintiffs’ water wells; (3) discharged natural gas into Plaintiffs’ groundwater; (4) allowed excessive pressure to build up within gas wells near Plaintiffs’ homes and water wells which resulted in an explosion; (5) spilled diesel fuel onto the ground near Plaintiffs’ homes and water wells; (6) discharged drilling mud into diversion ditches near Plaintiffs’ homes and water wells; (7) caused an explosion due to the accumulation of evaporated methane in wellheads; and (8) caused three significant spills within a ten-day period.4

Plaintiffs sought compensatory damages including loss of property value, natural resource damage, medical costs, loss of use and enjoyment of property, loss of quality of life, emotional distress, and personal injury. In addition, the Plaintiffs asked for punitive damages, the cost of remediation, the cost of future health monitoring, an injunction, and litigation costs and fees.

On September 12, 2012, a joint stipulation of dismissal was filed with the Court. The stipulation covered the majority of Plaintiffs, leaving members of two families and the estate of a deceased decedent plaintiff.

Defendants filed a motion for summary judgment on the remaining Plaintiffs’ strict liability claims on March 28, 2013. In a Report and Recommendation issued on January 9, 2014, the Magistrate Judge found that the “Plaintiffs have failed to support their assertion under Pennsylvania law that the Defendants’ gas drilling operations represent abnormally dangerous activities…[T]he Plaintiffs’ claims for property damage and personal injury should be considered under traditional and longstanding negligence principles, and not under a strict liability standard.” On April 23, 2014, the U.S. District Judge adopted the Report and Recommendation. In a footnote, agreeing with the Magistrate, the Judge stated that “based on an analysis of the six factors set forth in the Restatement (Second) of Torts §§ 520(1977), hydraulic fracturing does not legally qualify as an ultra-hazardous activity giving rise to strict tort liability.”

Also on March 28, 2013, Defendants filed motions for summary judgment on all other claims asserted by the remaining Plaintiffs. Issuing a Report and Recommendation on March 28, 2014 and on April 21, 2014, the Magistrate dismissed all but the Plaintiffs’ private nuisance claims against the Defendants. Objections to the Magistrate’s decision have been filed.

3 The gross negligence claim was dismissed as a separate cause of action on November 15, 2010. 4 The Pennsylvania Department of Environmental Protection (“PDEP”) also instituted a regulatory action against Cabot alleging methane contamination of certain residents’ water wells as a result of Cabot’s nearby drilling activities. The PDEP reached a settlement agreement with Cabot in December 2010. See Settlements Involving Hydraulic Fracturing and Shale Drilling, discussed infra.

4

Cabot has consistently maintained that the Plaintiffs’ water was suitable for consumption. Testing by the EPA in the winter and spring of 2012 served to confirm Cabot’s position.5

Kartch v. EOG Resources, No. 4:10-cv-00014 (D. N.D. March 4, 2010)

Frankie and Kristin Kartch (“Plaintiffs”) filed suit in the Northwest Judicial District Court, County of Mountrail, State of North Dakota, against EOG Resources, Inc. on August 13, 2009, alleging that EOG was drilling a well on their property without any contractual agreement for compensation. The lawsuit was removed to the U.S. District Court for District of North Dakota, Northwestern Division on March 4, 2010. This case settled and was dismissed by the Court on September 18, 2012.

In their Second Amended Complaint, Plaintiffs claimed that EOG had “entered upon a portion of the surface estate owned by Plaintiffs and constructed a road and a well pad, dug a waste pit, filled the pit with waste, and is operating a producing well with storage tanks and other associated facilities,” without an agreement between the parties regarding compensation for damages. They claimed that the waste pit constructed by EOG was not reasonably necessary to explore and develop the mineral estate and that there were reasonable and economical alternatives to the waste pit. The waste pit which was “negligently constructed and monitored was used to store benzene, diesel fuel, trace elements and other chemicals and toxins.” The toxic waste in the pit was not removed prior to EOG simply burying the liner and the contents of the pit. Plaintiffs sought compensation for damages to their surface estate.

Hallowich v. Range Resources Corporation, Williams Gas/Laurel Mountain Midstream, Markwest Energy Partners, L.P., Markwest Energy Group, LLC, and Pennsylvania Department of Environmental Protection, Case No. 2010-3954 (Pa. Ct. Com. Pl. May 27, 2010)

On May 27, 2010, by Praecipe to Issue Writ of Summons, the Hallowich family initiated an action against several oil and gas companies and the Pennsylvania Department of Environmental Protection, alleging that the companies’ drilling activities interfered with their enjoyment of their property rights and violated the state’s environmental laws. They complained that their water was polluted by the wells, pipelines, processing operations and truck traffic that came into the rural area where they built their home. Before filing a complaint, the Hallowiches settled the dispute on July 11, 2011. With minor children involved, as required by state law, the Hallowiches filed a Petition for Approval of Settlement of Minors.

A hearing was held on August 23, 2011, at which time the Court approved the settlement and the record was sealed. Immediately thereafter, two Pittsburgh newspapers sought to unseal the record. The newspapers’ initial petition to unseal the record was denied. On appeal, the

5 On August 22, 2012, the PDEP gave a green light to Cabot to resume fracking seven wells in Dimock County. See http://thetimes-tribune.com/news/dep-lets-cabot-resume-dimock-fracking-1.1361871.

5

Pennsylvania Supreme Court reversed and remanded the case. Back in the Court of Common Pleas of Washington County, briefs were filed and an evidentiary hearing held. The oil and gas companies argued that they had the right to negotiate a mutual confidentiality agreement under the privacy protections of the Commonwealth’s constitution.

On March 20, 2013, the Court ordered that the settlement agreement be unsealed and made available to the public. The Court found that there is “a presumption of openness under the common-law rule of access to the courts” and there is “no business-entity right of privacy within the Constitution of the Commonwealth of Pennsylvania to prevent the operation of that rule.”

The Judge concluded that the companies’ privacy rights were trumped by the press and public’s right of access to the record. “Confidentiality runs only between defendants and the Hallowiches. Thus, the unsealing of this record leaves these obligations wholly intact, because the parties remain just as gagged from speaking of the terms and conditions of the settlement as they were prior to the unsealing.” A page from the unsealed settlement agreement shows that the Hallowiches were paid $750,000.

Scoma v. Chesapeake Energy Corp., Chesapeake Operating, Inc., and Chesapeake Exploration, LLC, No. 3:10-cv-01385 (N.D. Tex., July 15, 2010)

Plaintiffs Jim and Linda Scoma, landowners in Johnson County, Texas, brought an action for negligence, nuisance, and trespass against Chesapeake Energy Corporation (dismissed without prejudice on July 27, 2011), Chesapeake Operating, Inc., and Chesapeake Exploration, LLC (collectively, “Chesapeake”). Plaintiffs settled their claims and, on December 9, 2011, the Court entered a Final Judgment dismissing all claims with prejudice.

Plaintiffs lived near oil and gas wells being developed by Chesapeake on adjacent property. In their complaint, Plaintiffs alleged that Chesapeake stored drilling waste at the well sites and disposed of fracturing waste in injection wells near Plaintiffs’ property. They claimed that, as a result of Chesapeake’s hydraulic fracturing and disposal activities, their water well became contaminated with benzene, toluene, ethylbenzene, xylene, barium, and iron.

For the nuisance claim, Plaintiffs asserted that the contamination prevented them from the use of their well water and made the enjoyment of their property uncomfortable and inconvenient. Plaintiffs stated in their trespass claim that Chesapeake exceeded its drilling rights on the adjacent property by causing petroleum by-products to enter Plaintiffs’ land and contaminate their water. Plaintiffs further alleged that Chesapeake breached its duty of care by negligently or unnecessarily damaging Plaintiffs’ land and well water. As damages, Plaintiffs sought the cost of water testing, loss of use of land, loss of market value of land, loss of intrinsic value of well water, emotional harm and mental anguish, nominal damages, exemplary damages, and injunctive relief.

6

Berish v. Southwestern Energy Production Co. and Southwestern Energy Co., No. 2010-1882 (Pa. Ct. Com. Pl., Sept. 14, 2010), removed to M.D. Pennsylvania, No. 3:10-cv-01981, on Sept. 29, 2010

In September 2010, a group of 13 families (“Plaintiffs”) filed suit in Susquehanna County, Pennsylvania against Southwestern Energy Production Company (“Southwestern”) and its parent Southwestern Energy Company (voluntarily dismissed by Plaintiffs on October 12, 2010). Berish v. Southwestern Energy Production Co., et al,, No. 2010-1882 (Pa. Ct. Com. Pl., Sept. 14, 2010). The case was removed to the Middle District of Pennsylvania on September 29, 2010. In their third amended complaint filed on May 17, 2012, Plaintiffs added four new defendants (Halliburton Energy Services, Inc.; BJ Services Company, Inc.; Schlumberger Limited (voluntarily dismissed on November 16, 2012); and Union Drilling, Inc.)6 (collectively, with Southwestern, “Defendants”).

Plaintiffs allege that, beginning in 2008, their water wells became contaminated from Defendants’ hydraulic fracturing and horizontal drilling activities within 700 to 1,700 feet of their water resources. They claim that Southwestern’s natural gas well was improperly cased, allowing contaminants such as diesel fuel, barium, manganese, and strontium to migrate to the water wells. According to the complaint, at least one plaintiff is exhibiting neurological symptoms consistent with exposure to heavy metals.

Plaintiffs assert causes of action for negligence per se, common law negligence, nuisance, strict liability, trespass, medical monitoring trust fund, and violation of the Pennsylvania Hazardous Sites Cleanup Act. On December 8, 2010, the Court dismissed a portion of Plaintiffs’ citizen’s suit under the Pennsylvania Hazardous Sites Cleanup Act. On September 4, 2012, the Court issued an order dismissing all personal injury claims (except for the minor who retained the right to assert a personal injury claim in the future if she develops an injury), all claims for natural resource damages, and portions of the negligence per se claim.

In their negligence claim, Plaintiffs allege that Defendants had a duty of care to (1) responsibly drill, own, and operate the natural gas well; (2) respond to spills and releases of hazardous chemicals; (3) prevent such releases and spills; and (4) take all measures reasonably necessary to inform and protect the public, including Plaintiffs, from the contamination of their water supply and exposure to hazardous chemicals and combustible gases. Plaintiffs further state that Southwestern has created and maintained a continuing nuisance by allowing the natural gas well to exist and operate in a dangerous and hazardous condition, resulting in injuries to Plaintiffs’ health, well being, and property. As for strict liability, Plaintiffs contend that “the use, processing, storage, and activity of hydro-fracturing” at the wells near their home constitute

6 The additional defendants provided services, equipment, and support for the drilling, casing, tubing, and fracking operations at the well site. Berish is one of the first cases in which plaintiffs named support companies, not just the operating and/or drilling company, as defendants. Including service and supply companies as defendants is likely to be a future trend. See Haney v. Range Resources, infra.

7

abnormally dangerous and ultra-hazardous operations, “subjecting persons coming into contact with the hazardous chemicals and combustible gases to suffer personal injuries, regardless of degree of caution Defendants might have exercised.”

Plaintiffs seek costs for remediation of the hazardous substances and contaminants and for the purchase of an alternative source of water. They want compensatory damages for lost property value, damage to the natural resources on the property, loss of quality of life, loss of use and enjoyment of their properties, emotional distress as to one plaintiff,7 inconvenience and discomfort, and personal injury. The complaint also requests punitive damages and preliminary and permanent injunctions against future contamination, as well as reasonable attorneys’ fees.

As for discovery, on January 28, 2013, the parties agreed to and the Court signed a Stipulated Case-Management Order that provides deadlines for Phase I discovery which focuses on causation of the alleged contamination or damages to the Price No. 1 well and of the alleged personal injuries suffered by a minor plaintiff. The Court limits and specifically sets out the topics that the parties can cover in their discovery requests. Plaintiffs can request Defendants to provide information about the drilling and construction of the well, including the substances and chemicals used during all phases of development (drilling, casing, cementing, and fracturing), the number of fracturing stages, the depth of each fracturing stage, sources of water, analysis of flowback water, how and where production water was stored, analyses or testing results related to subsurface geology and groundwater migration, and the sampling or testing of produced water, any potable water, and groundwater within 10 miles of the well. Defendants can request medical records, an independent medical examination, analyses and testing of water from any well alleged to be contaminated, construction and maintenance records of the well, and how Defendants’ activities or substances/chemicals caused the injuries alleged.

Under a stipulation to extend the second amended scheduling order, fact discovery for Phase I must be completed by May 23, 2014, with Plaintiffs’ expert reports due 60 days thereafter. Defendants’ expert reports are due 60 days later, with the deadline for expert depositions 60 days thereafter. Within 45 days of the close of Phase 1 Discovery, the parties must file their Daubert motions.

The parties are also entangled in a discovery issue involving trade secrets. Plaintiffs asked Southwestern and non-party Schlumberger Technology Corporation (“STC”) to produce open- hole logs and seismic data, maps, and interpretations relating to the well at issue. Both Southwestern and STC questioned the relevancy of these documents and asserted trade secret protection. On October 11, 2013, the court ordered the documents produced, finding that the documents were relevant and that Southwestern and STC had not met their burden to prove trade secrets. Both have asked for reconsideration of the court’s order. A hearing was scheduled for

7 The Court dismissed all other claims for emotional distress on February 3, 2011, see 763 F. Supp. 2d 702 (M.D. Pa. Feb. 3, 2011).

8

December 17, 2013. On January 16, 2014, the Court issued a Memorandum re-confirming its prior order that the documents should not be classified as trade secrets.

Armstrong v. Chesapeake Appalachia, LLC; Chesapeake Energy Corp. and Nomac Drilling, LLC, No. 10-cv-000680 (Pa. Ct. Com. Pl., Oct. 27, 2010), removed to M.D. Pennsylvania, No. 3:10-cv-002453, on Dec. 6, 2010, remanded to Pa. Ct. Com. Pl. on July 29, 2011.

In October 2010, Plaintiff Judy Armstrong filed suit in Bradford County, Pennsylvania against Chesapeake Appalachia LLC, Chesapeake Energy Corporation, and Nomac Drilling, LLC (“Defendants”). Armstrong v. Chesapeake Appalachia, LLC, et al., No. 10-cv-000680 (Pa. Ct. Com. Pl., Oct. 27, 2010). The case was removed to the Middle District of Pennsylvania on December 6, 2010 (Case No. 3:10-cv-02453). On January 20, 2011, Plaintiff added two new plaintiffs (Carl Stiles and Angelina Fiorentino) (collectively, “Plaintiffs”) and two new defendants (Great Plains Oilfield Rental LLC and Diamond Y Enterprise, Inc.) to the lawsuit. With the addition of these new Pennsylvania corporate defendants, there was no longer a basis for federal diversity jurisdiction. Plaintiffs filed a motion for remand which was granted on July 29, 2011.

Plaintiffs own property and water wells located three miles from oil and gas wells owned and operated by Defendants. They allege that Defendants’ use of improper drilling techniques, including defective and ineffective well casings, caused methane, ethane, barium, and other harmful substances to enter into and contaminate their water supply.

Plaintiffs assert causes of action and damages for negligence, negligence per se, nuisance, strict liability, trespass, medical monitoring trust funds, and violation of the Pennsylvania Hazardous Sites Cleanup Act.

As a result of water contamination complaints from Plaintiffs and others, the Pennsylvania Department of Environmental Protection (“PDEP”) initiated a joint review of possible natural gas drilling violations by Chesapeake. The results of the joint review were inconclusive and the PDEP reached a settlement agreement with Chesapeake on May 17, 2011. See Settlements Involving Hydraulic Fracturing, infra.

Sizelove v. Williams Production Co., LLC; Mockingbird Pipeline, LP; XTO Energy, Inc.; Gulftex Operating, Inc., Trio Consulting & Mgmt., LLC, and Enexco, Inc., No. 2010-50355- 367 (367th Dist. Court, Denton County, Tex. Nov. 3, 2010) (transferred to 431st Dist. Ct., Denton County, Tex. Jan. 1, 2011)

On November 3, 2010, the Sizelove family (“Plaintiffs”) filed suit against Williams Production Company, LLC (non-suited on April 6, 2011); Mockingbird Pipeline LP; XTO Energy, Inc. (dismissed with prejudice on March 21, 2012); Gulftex Operating, Inc. (dismissed with prejudice on May 16, 2012); Trio Consulting & Management, LLC (dismissed with prejudice on May 11,

9

2012); and Enexco, Inc. (non-suited on April 13, 2011) (collectively, “Defendants”) in Denton County, Texas. Williams Production-Gulf Coast Company, L.P. (n/k/a WPX Energy Gulf Coast, L.P.) and A&D Exploration Company were added as defendants on April 6, 2011 and April 13, 2011, respectively. This case was settled at mediation on November 9, 2012.

Plaintiffs initially sued for nuisance, trespass and negligence, alleging that Defendants’ compressor operations, gas drilling, and hydraulic fracturing caused Plaintiffs to suffer severe headaches and respiratory problems. Specifically, Plaintiffs claimed that Defendants’ operations were polluting the air and water surrounding Plaintiffs’ home with toxic hydrocarbons such as benzene, toluene, ethylbenzene, and xylene.

In July 2011, Plaintiffs amended their complaint, dropping their negligence claim and all allegations of water contamination. Plaintiffs continued to pursue their claims for trespass and nuisance. In their nuisance claim, Plaintiffs alleged that Defendants have substantially interfered with and invaded Plaintiffs’ private interest in their land by contaminating both the surface and the air above their property with hydrocarbons and other deleterious substances. For their trespass claim, Plaintiffs stated that Defendants wrongfully cut down nearly thirty trees on their property and allowed workers to use their land as a toilet.

Plaintiffs sought damages for the loss of market value of their land, sickness, annoyance, discomfort, bodily harm, injury to personal property, mental anguish, and additional exemplary damages.

Heinkel-Wolfe v. Williams Production Co., LLC; Mockingbird Pipeline, LP, XTO Energy, Inc., Gulftex Operating, Inc., Trio Consulting & Mgmt., LLC, and Enexco Inc., No. 2010- 40355-362 (362nd Dist. Court, Denton County, Texas, Nov. 3, 2010)

In November 2010, Margaret Heinkel-Wolfe and her daughter, Paige Wolfe,8 (“Plaintiffs”), filed suit against Williams Production Company LLC (dismissed without prejudice on April 6, 2011); Mockingbird Pipeline LP; XTO Energy Inc. (dismissed with prejudice on March 21, 2012); Gulftex Operating Inc.; Trio Consulting & Management LLC; and Enexco, Inc. (non-suited on April 13, 2011) (collectively, “Defendants”) in Denton County, Texas. Williams Production-Gulf Coast Company, L.P. (n/k/a WPX Energy Gulf Coast, L.P.) and A&D Exploration Company were added as defendants on April 6, 2011 and April 13, 2011 respectively. Defendants filed traditional and no evidence motions for summary judgment, but these became moot when the case was settled at mediation on August 14, 2012. A final judgment was signed by the court on August 27, 2012.

Plaintiffs sued Defendants for nuisance, negligence, and trespass, alleging that Defendants’ activities related to their produced water collection site, gas compressor stations, and gas drilling

8 On August 4, 2011, the daughter non-suited all Defendants.

10

polluted the air and water around Plaintiffs’ property and seeking damages for the loss of market value of their land, sickness, annoyance, discomfort, bodily harm, injury to personal property, mental anguish, and exemplary damages. As in Sizelove, supra, Plaintiffs amended their petition and voluntarily dropped their negligence claim and all allegations of water contamination.

Hagy v. Equitable Production Co.; Warren Drilling Co., Inc., BJ Services Co., USA, and Halliburton Energy Services, Inc., No. 10-c-163 (Jackson County Cir. Ct., Oct. 26, 2010), removed to U.S. District Court for the Southern District of West Virginia, No. 2:10-cv- 01372 on Dec. 10, 2010

The Hagy family (“Plaintiffs”) filed suit in West Virginia state court on October 26, 2010 against Equitable Production Co. (summary judgment granted on May 17, 2012); Warren Drilling Company, Inc. (dismissed with prejudice on April 25, 2012); BJ Services Company USA; and Halliburton Energy Services, Inc. (settled in March 2012) (collectively, “Defendants”).

In their complaint, Plaintiffs claimed contamination of their property and water well located approximately 1,000 feet from Defendants’ natural gas wells. One of the Plaintiffs allegedly suffered neurological symptoms consistent with toxic exposure to heavy metals.

Plaintiffs’ causes of action included negligence, negligence per se, nuisance, strict liability, trespass, and medical monitoring trust funds. Plaintiffs also sought an injunction against further drilling activities, along with compensatory damages, punitive damages, the cost of future health monitoring, and litigation fees and costs.

On July 22, 2011, the Court dismissed Plaintiffs’ claims of strict liability and medical monitoring and dismissed the claims of nuisance and trespass for two of the Plaintiffs (the adult children who no longer lived on the property). After settling with defendants Halliburton Energy Services, Inc. and Warren Drilling Company, Inc., on May 7, 2012, the adult children voluntarily dismissed all their other claims.

On March 19, 2012, BJ Services filed a motion for summary judgment and Plaintiffs responded. On May 23, 2012, the Court ordered Plaintiffs to clarify their response by specifying “exactly what conduct by defendant BJ Services is alleged to have caused them harm…” Plaintiffs filed their response to the Court’s Order on June 29, 2012. On that same date, the Court entered its Judgment Order, dismissing the lawsuit, stating that Plaintiffs failed to provide evidence that BJ Services acted negligently, trespassed, or created a private nuisance; or to prove a causal connection between BJ Services and Plaintiffs’ injuries.9

On July 30, 2012, Plaintiffs filed a Notice of Appeal to the U.S. Court of Appeals for the Fourth Circuit (Case No. 12-1926), appealing the Court’s orders granting the motions for summary

9 The Court did not consider Plaintiffs’ experts’ reports because Plaintiffs failed to identify the chemical to which they were exposed and to provide evidence of dose, exposure amount, and duration.

11

judgment filed by BJ Services Company USA and Equitable Production Company. The Fourth Circuit Court of Appeals issued its unpublished opinion on October 8, 2013, affirming the lower Court’s orders.

Mitchell v. Encana Oil & Gas (USA), Inc.; Chesapeake Operating, Inc.; Chesapeake Exploration, LLC, No. 3:10-cv-02555 (N.D. Tex., Dec. 15, 2010)

On December 15, 2010, Grace Mitchell (“Plaintiff”) filed suit against Encana Oil & Gas (USA) Inc.; Chesapeake Operating, Inc.; and Chesapeake Exploration, LLC (collectively, “Defendants”) in the U.S. District Court for the Northern District of Texas. This case was dismissed with a final judgment on December 27, 2011.

Plaintiff alleged that Defendants’ hydraulic fracturing and horizontal drilling activities and associated storage of drilling wastes had contaminated her water well in Johnson County, Texas. After Defendants commenced hydraulic fracturing operations near her property, Plaintiff claimed that her well water became slick to the touch and gave off a gasoline-like odor and that test results revealed the groundwater was contaminated with various chemicals, including C12-C28 hydrocarbons, similar to diesel fuel.

Plaintiff asserted causes of action for nuisance, trespass, negligence, fraud, and strict liability. For her nuisance claim, Plaintiff stated that Defendants had substantially interfered with and invaded her private interests in her land by contaminating her groundwater, offending her senses, and making her enjoyment of the property uncomfortable and inconvenient. For trespass, Plaintiff alleged that Defendants caused and permitted petroleum by-products to cross Plaintiff’s property boundaries and enter her land and groundwater, resulting in damage to the property and injury to Plaintiff’s right of possession. In addition, Plaintiff claimed that Defendants breached their duty to not negligently and unnecessarily damage her surface and subsurface estate, including the groundwater.

As for fraud, Plaintiff stated that Defendants failed to warn and/or concealed the danger that her groundwater would become contaminated from chemicals similar to diesel fuel. Finally, she alleged that Defendants should be held strictly liable because petroleum drilling and hydraulic fracturing constitute ultra-hazardous and abnormally dangerous activities. Both the fraud and strict liability claims were withdrawn when Plaintiff filed her amended complaint on April 25, 2011.

Plaintiff requested damages for loss of the use of groundwater, loss of market value of property, loss of the intrinsic value of well water, expenses incurred from buying water from an alternate source, medical monitoring damages, remediation, nominal damages, and exemplary damages.

12

Otis v. Chesapeake Appalachia, LLC, Chesapeake Energy Corporation, and Nomac Drilling, LLC, No. 3:11-cv-00115-ARC (M.D. Pa. (Scranton), Jan. 18, 2011)

Bidlack v. Chesapeake Appalachia, LLC, Chesapeake Energy Corporation, and Nomac Drilling, LLC, No. 3:11-cv-00129-ARC (M.D. Pa. (Scranton), Jan. 19, 2011)

Plaintiffs Edwin and Candy Bidlack, Jessie Northrup, and Jason and Janet Otis (“Plaintiffs”) filed their lawsuits in Pennsylvania Court of Common Pleas of Bradford County, on December 17, 2010. Bidlack, et al v. Chesapeake Energy Corp., et al; No. 10-EQ-000761 (Pa. Ct. Com. Pl., Dec. 17, 2010); Otis v. Chesapeake Energy Corp., et al; No. 10-EQ-000775 (Pa. Ct. Com. Pl., Dec. 17, 2010). Both the Bidlack lawsuit and the Otis lawsuit were removed to the U.S. District Court for the Middle District of Pennsylvania (Scranton) in mid-January 2011. The U.S. District Court has stayed both cases, requiring the parties to engage in binding arbitration of their claims. Plaintiffs’ counsel has filed motions to vacate the Court’s stay order, arguing that immediate action needs to be taken because the “harm to their residence and water supply is more extensive and more severe than originally contemplated…” Plaintiffs’ motions to vacate were denied on May 11, 2012. These cases remain stayed pending arbitration. In June 2013, the parties filed status reports with the Court, indicating that they were working to resolve the lawsuits.

Plaintiffs state that Defendants Chesapeake Appalachia, LLC, Chesapeake Energy Corporation, and Nomac Drilling, LLC (“Defendants”) located, drilled, and conducted explorations of wells within 1,000 feet of the Otis residence and water supply well and within a five mile radius of the Bidlack residence and water supply well. Plaintiffs allege that their water supplies have been contaminated and they have been exposed to hazardous chemicals and substances, including methane. They have lost the use and enjoyment of their residence and their quality of life, living in constant fear of future physical illness.

Plaintiffs’ causes of action include violations of the Hazardous Sites Cleanup Act, negligence, private nuisance, strict liability, trespass, and medical monitoring trust fund. For negligence, Plaintiffs accuse Defendants of failing to prevent and/or contain releases and migration of hazardous chemicals, failing to prevent contamination of the water supplies, creating a risk of explosion, and using improper drilling techniques and materials, including defective and ineffective well casings and negligent planning, training, and supervision of staff, employees and/or agents.

Plaintiffs seek costs for remediation of the hazardous substances and contaminants and compensatory damages for medical costs, loss of use and enjoyment of the property, loss of quality of life, emotional distress, personal injury, and future health monitoring. In addition, Plaintiffs have requested damages for the diminution of value of their residence and real property, including the debt service and cost to maintain the residence and real property. They

13

also request punitive damage and preliminary and permanent injunctions against future contamination, as well as litigation costs.

Harris v. Devon Energy Prod. Co., L.P., No. 4:10-cv-00708 (E.D. Tex., Dec. 22, 2010) (originally filed in the N.D. Tex. Case No. 3:10-02554, Dec. 15, 2010).

Doug and Diana Harris (“Plaintiffs”) brought action against Devon Energy Production Co., LP in the U.S. District Court for the Northern District of Texas (Case No. 3:10-cv-02554) on December 15, 2010. The case was transferred to the Eastern District of Texas on December 22, 2010.

Defendant, Devon Energy, drilled bore holes under and near Plaintiffs’ property in Denton County, Texas. Plaintiffs claimed that, after Devon Energy commenced hydraulic fracturing operations near their property, their groundwater became contaminated and polluted with a gray substance. According to the complaint, test results showed high levels of metals including aluminum, arsenic, barium, beryllium, calcium, chromium, cobalt, copper, iron, lead, nickel, potassium, and zinc.

In the complaint, Plaintiffs state causes of action for nuisance, trespass, negligence, fraud (dismissed July 12, 2011), and strict liability. The Court dismissed the fraud claim on July 12, 2011. Damages sought include loss of the use of land and groundwater, loss of market value of property, loss of the intrinsic value of well water, expenses related to testing contaminated water, expenses incurred from buying water from an alternate source, emotional harm and mental anguish, medical monitoring damages, remediation, nominal damages, and exemplary damages.

In an interesting turn of events, on December 6, 2011, shortly after Devon Energy filed a motion for summary judgment, Plaintiffs filed a motion to dismiss without prejudice, stating that “recent testing showed that the contamination is no longer at a toxic level for human consumption.” Plaintiffs stated that “[b]ecause the Plaintiffs’ groundwater has apparently purged itself of elevated levels of toxic substances, Plaintiffs cannot trace or prove that Defendant Devon was the cause of the Plaintiffs’ toxic water.” On December 21, 2011, in its response to the dismissal motion, Devon Energy asked the Court to dismiss the case with prejudice and award attorneys’ fees. On January 25, 2012, the Court dismissed the lawsuit without prejudice.

Teel v. Chesapeake Appalachia, LLC, No. 5:11-cv-00005-FPS (N.D. W. Va. January 6, 2011) (originally filed in the Circuit Court of Wetzel County, W. Va., Case No. 10-C-94DH, Nov. 30, 2010)

On November 30, 2010, plaintiffs Dewey and Gay Teel filed a complaint in the Circuit Court for Wetzel County, West Virginia, against Chesapeake Appalachia, LLC (“Chesapeake”) (Case No. 10-C-94DH). The case was removed to federal court on January 6, 2011.

14

Chesapeake began natural gas drilling on the Plaintiffs’ property in 2008. At that time, according to Plaintiffs, Chesapeake affirmatively assured them that the drilling area would be suitable for home sites after completion. Among the facilities constructed by Chesapeake was a pit or pond to hold the waste materials generated by the hydraulic fracturing and natural gas drilling operations. As described by Plaintiffs, the waste that was deposited into and eventually filled the pit “was dark, thick and smelled strongly of diesel fuel.” In 2009, Plaintiffs claim that Chesapeake brought in a “foamy, foul-smelling material by truck and deposited” it in the waste pond and in other trenches on their property. Further, Plaintiffs contend that, after Chesapeake’s heavy equipment breached the pit, allowing waste material to flow onto unprotected soil, Chesapeake simply covered the waste pit and trenches with dirt. The substances put into the pit and trenches remain beneath the surface, contaminating the soil and groundwater and killing grass, trees, and plants.

Plaintiffs assert causes of action for nuisance (intentional nuisance, unintentional nuisance, and nuisance per se), trespass, negligence, res ipsa loquitur, strict liability, recklessness or gross negligence, intentional infliction of emotional distress, and negligent infliction of emotional distress. They seek both monetary relief and injunctive relief, including the removal of the waste and remediation of the contaminated areas of the property.

In ruling on both parties’ motions for summary judgment, the Court found that Chesapeake’s use of pits for drill cuttings on Plaintiffs’ land was not a trespass. The Court then signed the parties’ joint stipulation of dismissal, enabling an appeal to the U.S. Court of Appeals for the Fourth Circuit to go forward (Case No. 12-2406). Briefs have been filed. On October 10, 2013, Chesapeake filed a motion to dispense with oral argument or to dismiss the appeal based on the Fourth Circuit’s decision in Whiteman v. Chesapeake Appalachia, LLC, infrra, which had the same issues and similar facts. In Whiteman, the appeals court upheld the lower court’s dismissal.

On October 17, 2013, referring to the Whiteman v. Chesapeake Appalachia, LLC lawsuit, infra, the Fourth Circuit affirmed the award of summary judgment to Chesapeake.

United States v. Range Production Company and Range Resources Corporation, No. 3:11-cv- 00116 (N.D. Tex., Jan. 18, 2011)

Range Production Company and Range Resources Corporation (collectively, “Range”) own and operate gas extraction wells in the Newark East (Barnett Shale) Field, in and around the Fort Worth, Texas area. On December 7, 2010, the U.S. Environmental Protection Agency (“EPA”) issued an Emergency Administrative Order (“EAO”) pursuant to Section 1431 of the Safe Drinking Water Act, 42 U.S.C. § 300i. The EAO identified contaminants that “may present an imminent and substantial endangerment to the health of persons,” and determined that two water

15

wells had been affected by Range’s drilling activities. The EPA also found that state and local authorities had not taken sufficient action to address the endangerment.10

The EAO required Range to: (1) notify the EPA of whether it intended to comply with the EAO within 24 hours; (2) provide replacement water supplies to the recipients of water from the affected water wells within 48 hours; (3) install explosivity meters at the affected dwellings within 48 hours; (4) submit a survey listing water wells within 3,000 feet of the gas wells at issue with a plan for EPA approval to sample those wells to see if they have been contaminated, including air and water samplings; (5) submit a plan for EPA approval to conduct soil gas surveys and indoor air analyses for all dwellings served by the affected water wells within 14 days; and (6) submit a plan to identify gas flow pathways to the affected aquifer if possible, and remediate impacted areas of the aquifer.

Range disputed the EPA’s finding and the validity of the EAO. At the request of the Administrator of the EPA, the United States filed a complaint for injunctive relief and civil penalties against Range on January 18, 2011 in the Northern District of Texas. The action by the U.S. alleged violations of the EAO, resulting in the presence of contaminants that may pose an imminent and substantial endangerment to the health of persons in violation of the Safe Drinking Water Act. The U.S. sought permanent injunctive relief to require Range to comply with the provisions of the EAO, as well as to pay a civil monetary penalty for each day of each violation.

On January 20, 2011, Range filed a petition for review of the EAO with the Fifth Circuit Court of Appeals (Case No. 11-60040), arguing that the EAO violated its due process rights. On June 20, 2011, the U.S. District Court for the Northern District of Texas entered an order staying its action until the Fifth Circuit ruled on Range’s petition. Oral arguments in the Fifth Circuit were heard on October 3, 2011. A decision from the Fifth Circuit became moot when the EPA withdrew its EAO on March 29, 2012, after the U.S. Supreme Court’s March 21, 2012 decision in the Sackett case, infra. The Fifth Circuit dismissed its case on April 2, 2012 while the District Court action was dismissed on March 30, 2012.

Of interest, in relation to determining the validity of an EAO issued by the EPA is Sackett v. Environmental Protection Agency, 622 F.3d 1139 (9th Cir. 2010), cert. granted June 28, 2011, a recent Ninth Circuit case that was granted certiorari to the U.S. Supreme Court and decided on March 21, 2012, Case No. 10-1062, 2012 WL 932018, 566 U.S. ____, 132 S.Ct. 1367 (Mar. 21, 2012). The Sacketts placed fill material on their Bonner County, Idaho property, which is located approximately 500 feet from Lake Priest, a navigable waterway. Claiming that the land was jurisdictional wetlands under the Clean Water Act, the EPA issued an administrative compliance order directing the Sacketts to remove the fill and restore the lot to its original condition or face civil penalties up to $32,500 per day per violation, plus administrative

10 Notably, a parallel investigation by the Texas Railroad Commission (“TRC”) concluded that Range’s operations of the gas wells did not cause or contribute to contamination of the water wells (Case No. 7B-0268629).

16

penalties. The Sacketts contested the EPA’s findings and filed a lawsuit asking the District Court to declare that their property was not protected wetlands. The District Court ruled, and the Ninth Circuit Court of Appeals agreed, that the Sacketts could not seek that declaration until the EPA asked a federal judge to enforce the EPA’s administrative order. The U.S. Supreme Court disagreed with both lower courts, holding that parties subject to an EAO have the right to challenge that compliance order in court before the agency brings legal action to enforce it.

Now that the U.S. Supreme Court has determined that the Sacketts had their due process rights violated and that the Sacketts and other alleged environmental violators have a right to judicial review of an EAO issued without a hearing or any proof of violation, the EPA’s use of EAOs may be curtailed.11

Whiteman v. Chesapeake Appalachia, LLC, No. 5:11-cv-00031-FPS (N.D. W. Va. February 23, 2011) (originally filed in Circuit Court of Wetzel County, W. Va., Case No. ______, Dec. 23, 2010)

In 2007, Chesapeake Appalachia, LLC (“Chesapeake”) began natural gas drilling on property owned by Martin and Lisa Whiteman. Chesapeake chose prime hay fields and graded approximately 10 to 15 acres of land, where it installed natural gas wells and ancillary facilities, including two large waste ponds used for the deposit of waste materials resulting from hydraulic fracturing and drilling operations. Chesapeake also deposited waste materials in open trenches on the property. The waste ponds with their contents were buried. The Whitemans believe that the waste is migrating through the soil, surface water and groundwater on their property.

On December 23, 2010, the Whitemans brought this lawsuit in the Circuit Court of Wetzel County, West Virginia, complaining that Chesapeake did not have permission to leave waste material on the site. The case was removed to federal court on February 23, 2011. The causes of action alleged are nuisance, trespass, negligence, strict liability, recklessness or gross negligence, intentional infliction of emotional distress, and negligent infliction of emotional distress. On June 7, 2011, the Court granted in part Chesapeake’s motion for summary judgment and dismissed the Whiteman’s trespass claim. On June 11, 2011, the parties stipulated to the dismissal of the remainder of the claims.

The order dismissing the trespass claim was appealed to the U.S. Court of Appeals for the Fourth Circuit, Case No. 12-1790. Oral arguments were heard on March 21, 2013. On September 4, 2013, the Fourth Circuit upheld the lower court’s dismissal of the trespass claim by finding that

11 Parties considering a judicial challenge to an EAO should be aware that the EPA would likely file a counterclaim and face review under the Administrative Procedures Act (“APA”). The APA might provide a favorable standard for the EPA if it prepares an administrative record. See B. Shrestha, “Sackett’s Impact on EPA Not So Dramatic, Ex- Official Says,” Law360, April 26, 2012.

17

…creating drill waste pits was reasonably necessary for recovery of natural gas and did not impose a substantial burden on the Whitemans’ surface property, that creation of the pits was consistent with Chesapeake’s rights under its lease, was a practice common to natural gas wells in West Virginia, and consistent with requirements of applicable rules and regulations for the protection of the environment.

Whiteman v. Chesapeake Appalachia, LLC, 729 F.3d 381, 2013 WL 4734969 (4th Cir. Sept. 4, 2013)

Smith v. Devon Energy Production Company, L.P., Case No. 4:11-cv-00104 (E.D. Tex., March 7, 2011) (originally filed in N.D. Texas, Case No. 3:11-cv-00196, on Jan. 31, 2011)

The Smith family complained that the quality of their water deteriorated after Defendant Devon Energy Production Company began natural gas exploration, hydraulic fracturing, and other production operations near their home. At first, their water supply contained sediment. They installed an in-line filtration system. That system worked well until April 2010 when Defendant installed a natural gas collection infrastructure about 600 feet away from their home. Then, according to the Smiths, the water became fouled with a grey, clay-like substance. This was reported to Defendant, who contacted the Texas Railroad Commission. Water samples were taken, and the results showed high levels of arsenic, barium, chromium, lead, and selenium. The Smiths stopped using their water supply.

The Smiths asserted causes of action for trespass, nuisance, and negligence for allowing metals, chemicals, and other substances from Defendant’s drilling and fracking activities to enter their land and their only source of drinking water. They sought damages for loss of land use, loss of market value, loss of intrinsic value of the well water, loss of value of groundwater, emotional harm and mental anguish.

On May 25, 2012, this lawsuit was dismissed on the Smiths’ motion, indicating that “water test results [provided during discovery] show that the well water no longer exhibits contamination in excess of the MCLs [maximum contaminant levels].”

Baker v. Anschutz Exploration Corp., Conrad Geoscience Corporation, and Pathfinder Energy Services, Inc., No. 6:11-cv-06119 (W.D. N.Y. March 9, 2011)

In February 2011, 15 landowners (“Plaintiffs”) filed suit under Cause No. 2011-1168 in the Supreme Court of the State of New York, Chemung County, against Anschutz Exploration Corporation (“Anschutz”); Conrad Geoscience Corporation (dismissed on June 12, 2013); and Pathfinder Energy Services, Inc. (stipulation of dismissal January 24, 2014) (collectively, “Defendants”). This case was transferred to the U.S. District Court for the Western District of New York, Rochester Division, on March 9, 2011.

18

Plaintiffs allege that Defendants were negligent in their drilling, construction, and operation of natural gas wells such that: (1) combustible gas was released into the headspaces of Plaintiffs’ water wells; (2) elevated levels of dissolved methane, propane, and other natural gases were present in Plaintiffs’ wells; (3) natural gas was discharged into Plaintiffs’ groundwater; (4) excessive pressures were present within gas wells near Plaintiffs’ homes and water wells; (5) pollutants including toxic sediments and industrial waste were discharged into the soil and water near Plaintiffs’ homes and water wells; and (6) drilling muds and fluids were allowed to be discharged onto the surface and into the subsurface near Plaintiffs’ homes and water wells. Specifically, Plaintiffs claim that Anschutz’s improper drilling, well capping, and/or cement casing caused toxic chemicals to be discharged into Plaintiffs’ groundwater. Plaintiffs further claim that, when hired by Anschutz to investigate possible contamination, Conrad Geoscience failed to conduct a reasonable and prudent investigation, in conformity with industry standards that would have warned Plaintiffs about the contamination.

The complaint sets out causes of action for negligence per se, common law negligence, nuisance, strict liability, trespass, medical monitoring, premises liability, fear of developing cancer, and deceptive business acts and practices. Damages sought include the loss of market value of land, costs of repair and restoration, loss of the use of land, expenses related to testing, medical monitoring, and consequential damages, in the amount of $150,000,000 per cause of action. Plaintiffs seek exemplary or punitive damages of at least $500,000,000, litigation costs, and attorneys’ fees.

Discovery is on-going. On September 25, 2012, the Court entered a Modified Scheduling Order requiring (a) Defendants to provide Plaintiffs with all data and documents relating to the monitoring of the water wells and (b) Plaintiffs to provide Defendants with (i) expert reports identifying all hazardous substances to which they claim exposure, the precise location of each exposure, and an explanation of causation; (ii) all studies and reports showing contamination of Plaintiffs’ property; and (iii) identification and quantification of contamination of Plaintiffs’ real property that Plaintiffs attributed to Defendants’ operations.

Fact discovery was completed on January 14, 2014. The parties have proposed that all expert reports and depositions be completed by June 30, 2014 and motions for summary judgment be due by August 8, 2014.

19

Parr v. Aruba Petroleum, Inc., Ash Grove Resources, LLC, Encana Oil & Gas (USA), Inc., Halliburton Co., Republic Energy, Inc., Ryder Scott Co., LP; Ryder Scott Oil Co., Tejas Production Services, Inc., and Tejas Western Corp., No. 11-01650-E (Dallas County Ct. at Law, Mar. 8, 2011)

Plaintiffs are a married couple in Wise County, Texas, owning property close to oil and gas wells being developed by defendants Aruba Petroleum, Inc.; Ash Grove Resources LLC;12 Encana Oil & Gas (USA) Inc.;13 Halliburton Company;14 Republic Energy Inc.;15 Ryder Scott Company, LP;16 Ryder Scott Oil Company;17 Burlington Resources Oil & Gas Company LP,18 Tejas Production Services, Inc.;19 and Tejas Western Corporation20 (collectively, “Defendants”).

Plaintiffs allege that Defendants’ natural gas drilling activities and operations, including releases, spills, emissions, and discharges of hazardous gases from vehicles, engines, construction, pits, condensate tanks, dehydrators, flaring, venting, and fracking, have exposed Plaintiffs and their property to hazardous gases, chemicals, and industrial wastes. Plaintiffs have identified more than 60 natural gas well sites that are located in close proximity to their property. Due to Defendants’ natural gas activities, Plaintiffs claim to have experienced serious health effects, with medical tests revealing the presence of natural gas chemicals, compounds, and metals such as ethylbenzene and xylene. The complaint further alleges that Defendants’ activities resulted in the death of household pets and chickens, and ultimately forced Plaintiffs to evacuate their home.

In the Eleventh Amended Petition filed on September 17, 2013, Plaintiffs asserted claims for common law negligence, gross negligence, negligence per se,21 private nuisance,22 and trespass.

12 Ash Grove Resources LLC was dropped as a named defendant in Plaintiffs’ Sixth Amended Petition filed on September 20. 2012. On March 22, 2013, the claims against Ash Grove Resources LLC and Tejas Western Corporation were severed (Cause No. CC-13-01784-E) for settlement purposes. A final judgment was entered on May 3, 2013. 13 On February 19, 2014, the claims against Encana Oil & Gas (USA), Inc. were severed (Case No. CC-14-00994-E) for settlement purposes. 14 On January 27, 2014, the claims against Halliburton Energy Services, Inc. were severed (Cause No. CC-14- 00371-E). 15 Republic Energy Inc. was dismissed with prejudice on November 11, 2011. 16 Ryder Scott Company, LP was dropped as a defendant in Plaintiffs’ Second Amended Petition filed on August 5, 2011. 17 Ryder Scott Oil Company was dropped as a defendant in Plaintiffs’ Fourth Amended Petition filed on February 2, 2012. 18 Burlington Resources Oil & Gas Company LP (“Burlington”) was added as a defendant in Plaintiffs’ Second Amended Petition. Burlington settled with plaintiffs and was dismissed on April 16, 2014 19 Tejas Production Services, Inc. was dismissed without prejudice on July 25, 2012. 20 Tejas Western Corporation was dropped as a named defendant in Plaintiffs’ Sixth Amended Petition filed on September 20. 2012. On March 22, 2013, the claims against Ash Grove Resources LLC and Tejas Western Corporation were severed (Cause No. CC-13-01784-E) for settlement purposes. A final judgment was entered on May 3, 2013. 21 For negligence per se, Plaintiffs set out four (4) statutes allegedly violated by Defendants. These are the Texas Administrative Code (Chapter 101. §101.4) relating to water protection, leaks, and environmental quality, Texas

20

Plaintiffs seek actual damages in a maximum amount of $66,000,000 for medical expenses, loss of earning capacity, loss of consortium, property damage, loss of market value, replacement and repair costs, sentimental value damages, loss of use, medical monitoring, cost of remediation, unliquidated damages, attorneys’ fees, nominal damages, and exemplary damages. In addition, Plaintiffs seek a permanent injunction to preclude current and future drilling and hydraulic fracturing activities near Plaintiffs’ land.

In January 2014, the court severely limited the family’s lawsuit by dismissing the claims for negligence and negligence per se and only allowing the nuisance and trespass claims to go forward. For the family’s personal injury damages, the court ruled that these would be limited to injuries that were “within the common knowledge and experience of a layperson” and barred recovery for “any claim that defendants’ actions caused a disease that occurs genetically and for which a larger percentage of the causes are unknown.” The court also disallowed expert testimony, stating that “the sequence of events is such that a layperson may determine causation without the benefit of expert evidence.”

The trial of this case started on April 8, 2014, one of the first hydraulic fracturing personal injury cases to come to trial. In opening argument, counsel for the Parr family explained that, since 2008 when defendant began to drill numerous gas wells in the area surrounding the family’s home, they have suffered numerous medical problems, at times so severe that they could not work and had to leave their home. Due to defendant’s natural gas activities, including hydraulic fracturing, flaring, venting, and discharges of hazardous gases, the Parr family claims to have experienced serious health effects, with medical tests revealing the presence of natural gas chemicals, compounds, and metals, including among others ethylbenzene and xylene.

Defense counsel advised the jury that the Parr family could not prove that one of Aruba’s 22 wells within a two-mile radius of the residence, out of the hundreds of wells in the area, made them sick. Counsel argued that there is no proof of diminished air quality at the home following drilling, asserting that its wells stayed within the air quality limits set by the Texas Commission on Environmental Quality and the Texas Railroad Commission. Counsel also explained that the company operates within industry standards and best practices. As for the Parr family’s medical conditions, counsel stated that evidence would be presented to show that the family suffered from these same maladies before the companies started drilling.

Penal Code (§22.01) for assault, Texas Penal Code (§28.04) for reckless damage or destruction to property, and Texas Civil Practice & Remedies Code (§75.002(h))for trespass. 22 Plaintiffs include claims for negligent private nuisance, intentional private nuisance, and per quod private nuisance. For the per quod claim, Plaintiffs allege that, even absent negligence or intentional private nuisance, Defendants engaged in activities that were “abnormal and out of place in their surroundings.” Plaintiffs set out a list of “Private Nuisance Activities” which include Defendants’ alleged air and subsurface trespass as well as the creation of offensive noise, odors, smells, sights and light pollution, heavy traffic, and disturbances “in the natural environment to cause wildlife to flee..”

21

On April 22, 2014, a Dallas jury in a 5 to 1 verdict awarded $2.925 million to the Parr family. Answering the questions in the court’s charge, the jury found that Aruba had intentionally created a private nuisance with its activities and awarded $275,000 for loss of market value, $2.0 million for past pain and suffering, $250,000 for future pain and suffering, $400,000 for past mental anguish, and $0 for future mental anguish. The jury did not award exemplary damages, finding no malice and that Aruba’s conduct was not abnormal nor out of place in its surroundings.

Counsel for Aruba stated that post-verdict motions challenging the verdict will be filed; and, if the verdict is entered, an appeal is likely. The court has set a final disposition hearing for May 27, 2014 at 9 a.m.

Strudley v. Antero Resources Corp., Calfrac Well Services, and Frontier Drilling LLC, No. 2011-cv-2218 (Denver County Dist. Ct., Mar. 23, 2011)

On March 23, 2011, the Strudley family (“Plaintiffs”) sued Antero Resources Corporation; Calfrac Well Services (“Calfrac”); and Frontier Drilling LLC (collectively, “Defendants”) in Colorado state court. According to Plaintiffs, Defendants operate several natural gas wells in Garfield County, Colorado, within one mile of their residence and water supply well. Plaintiffs allege that environmental contamination from Defendants’ drilling activities caused health injuries, loss of use and value of their property, loss of quality of life, emotional distress, and other damages. Specifically, Plaintiffs stated that Defendants’ negligence caused the presence of hydrogen sulfide, hexane, n-heptane, toluene, and other toxic hydrocarbons and hazardous pollutants to be discharged into the air, ground, and aquifer near Plaintiffs’ property.

The Strudleys set out causes of action for negligence per se, common law negligence, nuisance, strict liability, trespass, and medical monitoring trust funds. On July 20, 2011, the Court dismissed the negligence per se claim against Calfrac, finding that fracturing fluids and other oil and gas materials used by Calfrac were not “wastes” under the Colorado Hazardous Waste Act and that Calfrac was not an operator or owner as required by the Colorado Oil and Gas Conservation Commission regulations.

Damages sought in this case included the cost of remediation, cost of future health monitoring, compensatory damages, loss of use and enjoyment of property, loss of quality of life, emotional distress, personal injury, diminution of property value, and litigation costs and fees.

In their Motion to Modify the Court’s Case Management Order filed on September 19, 2011, Defendants asserted that Plaintiffs had only provided vague allegations of injury and exposure and that Plaintiffs failed to identify any current or future disease or to allege that any treating physician or qualified scientist had connected any such disease to the chemicals or wastes used during Defendants’ operations. Because of the vagueness of the claims, Defendants argued that

22

the Court should issue a “Lone Pine” order,23 requiring Plaintiffs to make a prima facie showing of exposure, injury, and specific causation by providing expert affidavits. The Court agreed with the Defendants and, on November 10, 2011, ordered Plaintiffs to provide sufficient evidence of their claims by means of sworn affidavits from doctors, contamination reports, and other information relating to the identification and quantification of contamination on their property attributable to Defendants’ operations. Plaintiffs presented their evidence to the Court on February 23, 2012.

Defendants filed a Motion to Dismiss or, in the Alternative, for Summary Judgment on March 23, 2012, arguing that the Plaintiffs’ evidence was insufficient to support their claims. The Court agreed, ruling that the affidavit from Plaintiffs’ doctor failed to establish a causal connection between Plaintiffs’ injuries and Defendants’ drilling activities, and dismissed Plaintiffs’ claims with prejudice on May 9, 2012. Plaintiffs appealed this dismissal.

On July 3, 2013, the Colorado Court of Appeals (Case No. 12 CA 1251) reversed the Lone Pine order and the dismissal order. The Court cited two primary reason for doing so. The first was anchored in two Colorado Supreme Court cases that the court interpreted as standing for the proposition “that a trial court may not require a showing of a prima [facie] case before allowing discovery on matters central to a plaintiff’s claims.” Second, the court cited differences between Colorado Rule of Procedure 16 and Federal Rule of Civil Procedure 16.24 (Federal courts often cite to Fed. R. Civ. P. 16 as the basis of their authority to issue Lone Pine orders.) The Court further held that, even assuming it was writing on a blank slate, unlike the majority of cases allowing Lone Pine orders, this was not a mass tort case nor was it “any more complex or cost intensive than an average toxic tort case.” The Court saw this lawsuit as a simple case involving four family members suing four defendants over alleged pollution of one parcel of land, making the Lone Pine order unnecessary.

On August 29, 2013, the Defendants filed a Petition for Writ of Certiorari with the Colorado Supreme Court (Case No. 2013SC576), requesting review of the Court of Appeals decision. The Colorado Defense Lawyers Association, the Colorado Civil Justice League, and the American

23 See Lore v. Lone Pine Corp., No. L-33606-85 1986 WL 635707 (N.J. Sup. Ct. Nov. 18, 1986). In order to streamline the proceedings in this toxic tort case, the court entered a case management order requiring the Plaintiffs to present certain basic facts regarding their claims of contamination from a landfill. First, the court required the Plaintiffs to provide the following documentation with respect to each personal injury claim: (i) facts of each individual Plaintiff’s exposure to alleged toxic substances at or from the site; and (ii) reports from treating physicians or other experts, supporting each individual Plaintiff’s claim of injury and causation. The court then required the Plaintiffs to give the following with respect to the property damage claims: (i) location of the property; and (ii) reports from real estate or other experts supporting property damage claims, including the timing and degree of the damage as well as causation of the same. 24 Fed. R. Civ. P. 16(c)(2) allows a federal court to “consider and take appropriate action…” to formulate and simplify the issues and eliminate frivolous claims or defenses. The Colorado Court of Appeals points out that, while the Colorado rule does not contain this language, rules relating to motions to dismiss and motions for summary judgment “provide adequate procedures for challenging claims lacking in merit.”

23

Petroleum Institute have all filed amicus curiae briefs in support of the use of Lone Pine orders in Colorado.

On April 7, 2014, the Colorado Supreme Court agreed to review the appeals court decision. Two questions will be addressed by the Supreme Court:

• Whether a district court is barred as a matter of law from entering into a modified case management order requiring the plaintiffs to produce evidence essential to their claims after initial disclosures but before further discovery.

• Whether, if such modified case management orders are not prohibited as a matter of law, the district court in this case acted within its discretion in entering and enforcing such an order.

The decision of the Colorado Supreme Court will be of great interest to both plaintiffs and defendants – with plaintiffs wanting Lone Pine Orders prohibited and defendants, seeking the opposite, seeing Lone Pine Orders as a means to fend off frivolous lawsuits early on by requiring plaintiffs to establish a causal connection.

Andre v. EXCO Resources, Inc. and EXCO Operating Co., No. 5:11-cv-00610-TS-MLH (W.D. La. April 15, 2011)

Beckman v. EXCO Resources, Inc. and EXCO Operating Co., 5:11-cv-00617-TS-MLH (W.D. La. April 18, 2011)

On April 15, 2011, David Andre, individually and on and behalf of “consumers of water in the immediate vicinity of DeBroeck Landing, Caddo Parish, Louisiana” and, on April 18, 2011, Daniel Beckman with seven other person (collectively “Plaintiffs”) filed suit against EXCO Resources, Inc. and EXCO Operating Company.

According to both complaints, on April 18, 2010, a natural gas well operated by EXCO near DeBroeck Landing “experienced problems resulting in the contamination” of the Caddo Parish aquifer and all of the Plaintiffs’ properties.

While the complaints do not allege that EXCO engaged in hydraulic fracturing, the Plaintiffs seek to compel disclosure of the formulation of the “drilling muds and solutions” allegedly used by EXCO in the natural gas well in order to allow “appropriate tests and monitoring of the aquifer [to] take place.”

Plaintiffs set out causes of action for negligence, strict liability, nuisance, trespass, unjust enrichment, and impairment of use of property. They seek a variety of damages, including groundwater remediation costs, diminution of property value, and losses from property market value “stigma.” They also seek a declaratory judgment, “general and equitable relief,” economic

24

damages, and mental anguish and emotional distress damages. Additionally, the Plaintiffs request an order requiring remediation by EXCO of the groundwater and development of a “long-term monitoring program” near the site of the alleged well failure and the allegedly contaminated aquifer.

On November 12, 2013, the court entered a final order certifying the settlement class (any person owning, residing or working at residences or businesses within 1.5 miles of the incident that were subject to a mandatory evacuation for any period of time between April 18, 2010 and May 4, 2010), approving the settlement, and dismissing the action with prejudice.

Ginardi v. Frontier Gas Services, LLC, Kinder Morgan Treating LP, Chesapeake Energy Corporation, and BHP Billiton Petroleum, No 4:11-cv-0420 BRW (E.D. Ark. May 17, 2011)

On May 17, 2011, a class action suit was filed on behalf of all Arkansas residents who live or own property within one mile of any natural gas compressor or transmission station (collectively, “Plaintiffs”). Defendants are Frontier Gas Services, LLC; Kinder Morgan Treating, LP; Chesapeake Energy Corp.; and BHP Billiton Petroleum (Fayetteville), LLC (dismissed without prejudice on August 17, 2011) (collectively, “Defendants”). On July 8, 2011, Crestwood Arkansas Pipeline LLC was added as a defendant. According to Plaintiffs, Defendants used hydraulic fracturing to produce gas from the Fayetteville Shale and own and operate related facilities across the state of Arkansas. Plaintiffs complained that Defendants’ operations pollute the atmosphere, groundwater, and soil with harmful gases, chemicals, and compounds. The causes of actions alleged by Plaintiffs were strict liability, nuisance, trespass, and negligence.

Plaintiffs sought compensatory and punitive damages for loss of use and enjoyment of property, contamination of soil, contamination of groundwater, contamination of air and atmosphere, loss of property value, and severe mental distress. Besides punitive and compensatory damages, Plaintiffs further requested establishment of a fund for monitoring future air, soil, and groundwater contamination, costs, and pre-judgment interest. The Court dismissed Plaintiffs’ claim for attorneys’ fees on August 10, 2011.

On December 14, 2011, Plaintiffs filed a motion for partial summary judgment on their trespass cause of action, alleging that there was no disputed issue of fact that Defendants’ activities trespassed upon Plaintiff’s property. On January 17, 2012, the Court denied this motion as being premature, advising that the class certification had to be held first. On February 6, 2012, Plaintiffs filed their Motion to Certify Class. The certification hearing was held on April 3, 2012. On April 6, 2012, the Judge issued a letter stating that “I am much inclined to deny class certification…” A formal order denying class certification was issued on April 19, 2012, with the Court ruling that “individual issues presented in this case predominate over the common issues.”

25

On July 11, 2012, the parties filed a Joint Motion to Dismiss With Prejudice, stating that they had “resolved and settled all their claims and cross-claims” and that the case should be dismissed with prejudice.

Tucker v. Southwestern Energy Co., XTO Energy, Chesapeake Energy Corp., and BHP Billiton Petroleum, No. 1:11-cv-0044-DPM (E.D. Ark. May 17, 2011)

Berry v. Southwestern Energy Co., XTO Energy, Chesapeake Energy Corp., and BHP Billiton Petroleum, No. 1:11-cv-0045-DPM (E.D. Ark. May 17, 2011)

On May 17, 2011, two class action suits were filed on behalf of all Arkansas residents who live or own property within three miles of any bore holes, wellheads, or other gas extraction operations. These two cases were consolidated on July 22, 2011. Southwestern Energy Corporation; XTO Energy (dismissed on July 15, 2011); Chesapeake Energy Corporation (dismissed with prejudice on May 17, 2012); and BHP Billiton Petroleum (Fayetteville), LLC (collectively, “Defendants”) were the defendants. These cases settled and were dismissed on August 29, 2012.

On February 17, 2012, the Court ordered Plaintiffs to amend their complaints to “plead more facts to give the companies notice of what and how each driller supposedly did wrong” because the complaints are “too thin on some critical facts.” The Court also determined that the motion to deny class certification was premature and would be considered after Plaintiffs amended their complaints. Plaintiffs filed their Combined Amended Complaint on March 23, 2012, adding two plaintiffs and adding more facts to support their claims for strict liability, nuisance, trespass, and negligence.

On July 2, 2012, Plaintiffs asked the Court for permission to file their Second Combined Amended Complaint (“Second Complaint”) in order to “remove certain parties who are no longer Defendants…and to add allegations concerning Southwestern Energy’s “Underwood experimental salt water disposal well.” The Court granted Plaintiffs’ motion and the Second Complaint was filed on July 11, 2012. This Second Complaint did not include BHP Billiton as a named defendant.

Plaintiffs claimed that Defendants’ drilling operations in the Fayetteville Shale polluted their soil, groundwater, air, and water wells. Plaintiffs asserted that their water wells and groundwater were contaminated with alpha methyl styrene or had emitted methane and hydrogen sulfide.

Plaintiffs sought punitive and compensatory damages for loss of use and enjoyment of their property, contamination of soil, contamination of groundwater, contamination of water wells, contamination of air and atmosphere, loss of property value, emotional and mental anguish, and physical harm and injury. Additionally, Plaintiffs requested establishment of a fund for

26

monitoring future air, soil, and groundwater contamination, costs and attorney’s fees, and pre- judgment interest.

Ruby Hiser v. XTO Energy, Inc., No. 4:11-cv-00517-KGB (E.D. Ark. June 24, 2011)

On June 7, 2011, plaintiff Ruby Hiser sued XTO Energy, Inc., alleging that XTO’s natural gas drilling operations on her next-door neighbor’s property “created mechanical vibrations which have caused near-total destruction of the Plaintiff’s home and continues to cause injury to” her and her home. According to the Plaintiff, her home was rendered unstable and un-level, the roof separated from the home, ceramic tile and mortar cracked and loosened, windows were broken, and there were cracks in the ceilings and walls throughout the home. She plead nuisance per se and unlawful trespass. Damages sought included the value of her home and the diminution in value of her property, the loss of use and enjoyment of her property, and the intentional and negligent infliction of emotional distress which have caused harm to Plaintiff’s health and welfare.

This case was tried to a jury on August 27-29, 2012, with a final judgment signed on September 10, 2012. The verdict was in favor of the plaintiff, with a damage award of $300,000 ($100,000 compensatory and $200,000 punitive damages). During deliberations, the jurors sent out a question asking “were they [XTO] drilling only or were they also fracking?” The Court instructed the jury to make their decision based on what they recalled of the evidence. It is undisputed that there was no evidence of hydraulic fracturing presented at trial and that any discussions among the jurors as to fracking were outside the record.

After the verdict, XTO’s counsel’s request to contact the jurors was granted. One of the jurors provided an affidavit stating that the jurors discussed the negative impact that fracking might have had on the plaintiff’s property. More specifically, the jurors discussed that fracking caused earthquakes and vibrations.

XTO filed a motion for new trial based on the jury’s alleged misconduct. On April 23, 2013, the Court issued an order, stating that it would examine whether the jury had discussed extraneous information in making its decision. Two jurors were called to testify before the Court. On September 30, 2013, the Court denied XTO’s motion for a new trial, stating in part that the jury had not been influenced by extraneous, prejudicial information.

XTO filed a notice of appeal to the 8th Cicruit Court of Appeals (No. 13-03443) on October 3, 2013. Briefs have been filed, and the parties are awaiting the scheduling of oral arguments.

27

Lipsky v. Durant, Carter, Coleman LLC, Silverado on the Brazos Development Company #1 Ltd., Jerry V. Durant, James T. Coleman, Estate of Preston Carter, Range Production Company, and Range Resources Corp., Cause No. CV11-0798 (Parker County Dist. Ct., June 20, 2011)

In 2005, Steven and Shayla Lipsky (“Plaintiffs”) built their dream home in Silverado on the Brazos, a subdivision developed by Durant, Carter, Coleman LLC in Parker County, Texas In the summer of 2010, Plaintiffs discovered that their well water contained benzene, toluene, ethane, and a large amount of methane gas, making the well unusable. Plaintiffs learned that Range Production Company and Range Resources Corporation (the “Range Defendants”) had begun to extract gas from the Barnett Shale formation very near their home, in direct violation of the subdivision’s covenants. Plaintiffs filed their lawsuit on June 20, 2011, seeking $6.5 million in damages.

Earlier, in December 2010, the EPA issued an emergency order against Range, finding that the hydrocarbons in the Plaintiffs’ well water were likely caused by gas drilling and posed serious health risks.25 Later this statement was refined to indicate that the hydrocarbons from Range’s operations may have caused or contributed to the contamination. The order reqired Range to conduct research on the source and extent of contamination, provide drinking water to affected residents, and develop a plan to mitigate contamination in the aquifer. Range did not fully comply with the order, and legal actions between Range and the EPA ensued. The sides settled in March 2012, with Range agreeing to test the North Texas wells for a year and share the findings with the EPA. But Range admitted no guilt and was not ordered to provide residents with another water source.26

The Texas Railroad Commission (“Commission”) stepped in to investigate the claims; and in March 2011, the Commission issued an order exonerating the Range Defendants, stating that Range’s wells were not responsible for the contamination of Plaintiffs’ water and that the methane gas in the water wells likely was naturally occurring and came from the shallow Strawn geological formation, far above the Barnett Shale.

In the lawsuit, the Range Defendants filed a plea to the Court’s jurisdiction, alleging that Parker County was not the proper venue for challenging the Commission’s order. On January 30, 2012,

25 See United States v. Range Production. Co., et al,. supra. 26 A Congressional inquiry was launched to review this settlement order. The Inspector General issued a response to this inquiry on December 13, 2013, finding that the regions subsequent enforcement actions, conformed to agency guidelines, regulations and guidelines. However, the report recommended that the Region 6 Regional Administrator (1) collect and evaluate the testing results being provided by Range to determine whether the data is of sufficient quality and utility, (2) determine whether an imminent and substantial endangerment still exists at the original residential well involved, (3) inform the affected residents of the present status of the contamination and of any Region 6 planned actions, (4) work with the Railroad Commission of Texas to ensure appropriate actin is taken as needed, and (5) document the costs and resources invested to complete the work included in these recommendations. See http://www.epa.gov/oig/reports/2014/20131220-14-P-0044.pdf for a copy of the report.

28

the Court ruled that Plaintiffs should have filed their lawsuit in Travis County, where the Commission sits. Because the statute of limitations has run on appealing the Commission’s decision, the Court’s order essentially dismissed Plaintiffs’ claims against the Range Defendants.27

Evenson v. Antero Resources Corporation, Antero Resources Piceance Corporation, and John Doe Well Service Providers; No. 2011-cv-5118 (Denver County Dist. Ct., July 20, 2011)

This lawsuit was filed by several families (“Plaintiffs”) residing in Battlement Mesa, Garfield County, Colorado, who claimed that the drilling and exploration activities of Antero Resources Corporation, Antero Resources Piceance Corporation, and John Doe Well Service Providers (collectively “Defendants”) were exposing their properties and persons to hazardous gases, chemicals, and industrial wastes. Plaintiffs requested class action status for more than 1,000 property owners and 5,000 past and present residents of the community. Plaintiffs’ claims was based on one alleged incident in which petroleum odors emanated from one well pad near Battlement Mesa.

Based on the anticipated effects of future natural gas drilling, Plaintiffs sought equitable relief requiring Defendants to use unspecified practices to prevent releases, spills, and discharges;

27 The lawsuit in Parker County continues on Range’s counterclaims for defamation, business disparagement, and conspiracy under the Texas anti-SLAPP (strategic lawsuits against public participation) Act, 27 Tex. Civ. Prac. & Rem. Code § 27.001 et seq. The defamation and business disparagement claims are based in part on videos purportedly showing Steven Lipsky setting fire to well water flowing from a garden hose, while in reality the hose was attached to the gas vent on the water well.

The Lipskys appealed the trial court’s February 16, 2012 order, in which the court denied their motion to dismiss and found “sufficient clear and specific evidence” for Range’s counterclaims. Steven and Shyla Lipsky and Alisa Rich v Range Production Company and Range Resources Corporation, in Case No. 2-12-00098, in the Second Court of Appeals for the State of Texas (filed March 12, 2012). The Court of Appeals dismissed this appeal for want of jurisdiction, stating that it had no jurisdiction over an interlocutory appeal under the anti-SLAPP Act. On October 8, 2012, the Lipskys appealed this decision to the Texas Supreme Court (Case No. 12-0811), which dismissed the petitions for review on December 3, 2013.

On August 23, 2012, the Lipskys filed a request to proceed as a petition for writ of mandamus (Case No. 2-12- 00348-CV, In re Steven and Shyla Lipsky and Alisa Rich). On April 22, 2013, the Court of Appeals concluded that there was enough evidence for Range to proceed with its defamation and business disparagement counterclaims against Steven Lipsky, but the claims against Shyla Lipsky and Alisha Rich should be dismissed. All motions for rehearing and en banc reconsideration were denied on October 10, 2013.

The Lipskys filed a Petition for Writ of Mandamus to the Texas Supreme Court on November 25, 2013 (Case No. 13-0928, In Re Lipsky), arguing that the entire case should be dismissed because Range did not show clear and specific evidence of the alleged defamation. On December 2, 2013, Range countered with its own Petition for Writ of Mandamus (Case No. 13-0928, In Re Range Production Company and Range Resources Corporation), seeking to reinstate the dismissed claims and asking the Court to determine what and how much evidence must be shown to prove that a claim under the Texas Citizens Participation Act (TCPA) is not frivolous. Responses and replies to the writs of mandamus have been filed. Briefs on the merits have been requested by the Court, with the first brief due May 1, 2014.

29

compensation for diminution in property value resulting from a “stigma” that has attached to the property; and creation of a medical monitoring fund to cover the costs arising from the alleged intentional, knowing, reckless and negligent acts and omissions of the Defendants in connection with their releases, spills, and discharges of hazardous chemicals used in their drilling activities.

The Antero Defendants filed a motion to dismiss, arguing that Plaintiffs had not asserted any legal claims for relief, but only requested remedies based on conduct that had not yet occurred. Further the Antero Defendants asserted that Plaintiffs had failed to plead any injury to their property; that Plaintiffs were attempting to usurp the jurisdiction of the Colorado Oil and Gas Conservation Commission by imposing additional drilling and operational requirements on the Antero Defendants; and that medical monitoring was not a recognized cause of action in Colorado. Moreover, the Antero Defendants argued that all of Plaintiffs’ claims were not “ripe” since they were based on speculative future drilling and operational activities. The Court ruled in favor of the Antero Defendants on August 17, 2012 and dismissed the claims.

Kamuck v. Shell Energy Holdings GP, LLC, Shell Energy Holdings LP, LLC, and SWEPI, LP (d/b/a Shell Western Exploration and Production, LP); No. 4:11-cv-01425-MCC (M.D. Pa., August 3, 2011)

Edward Kamuck (“Plaintiff”) brought this lawsuit claiming damages from hydraulic fracturing activities on his 93-acre tract of land, which was under an oil and gas lease at the time of his purchase in 2009.28 Plaintiff complains that fracking fluid contains significant amounts of hazardous, toxic and carcinogenic chemicals which remain in the well, come to the surface, and harm his property and his health. He further complains that 100 to 150 vehicles a day go directly past his residence (within 45 feet) on an unpaved, dusty road, creating noise and dust. In addition, Plaintiff claims that Defendants spray an unidentified fluid on the dirt roads which drains into the ditches and seeps into the ground.

Plaintiff has brought the following causes of action relating to hydraulic fracturing: injunctive relief (prohibiting all fracking operations and related activities), anticipatory trespass, private nuisance, negligence, negligence per se, gross negligence, and strict liability. On April 27, 2012,29 upon Defendants’ motion, the Court dismissed the claims for anticipatory trespass, negligence per se, and gross negligence. The Judge indicated that he would entertain motions for summary judgment on the remaining claims of negligence, strict liability, and private nuisance after discovery was completed

Plaintiff seeks damages for the reasonable and necessary costs of remediation of the hazardous substances and contaminants on his property, the cost of future water and health monitoring, loss

28 Plaintiff is also suing to correct an alleged improper unitization under the oil and gas lease as well as to stop Defendants from drilling into the Marcellus Shale because the lease only allowed unitization for drilling in the Onondaga or Oriskany formations or below. The Marcellus Shale is located above these formations. 29 See 2012 WL 1466490.

30

of property value, damage to natural resources, medical costs, loss of use and enjoyment of property, loss of quality of life, emotional distress, and other reasonable damages.

On June 21, 2012, Defendants’ filed a Motion for A Modified Case Management Order, requesting that the Court enter a “Lone Pine” order30 as in the Strudley case, supra. Plaintiff argued that such an order was not warranted because this was not a mass tort case, having only one plaintiff, and the motion seeks to circumvent the standing discovery orders. On September 5, 2012, the Court denied this motion, finding that it was not currently warranted “despite what appear to be arguable shortcomings on the part of Plaintiff’s allegations and evidentiary production to date.”

Since December 2013, Plaintiff has been proceeding pro se. On January 17, 2014, the Defendants filed a Motion to Dismiss for Lack of Prosecution Pursuant to Rule 41(b) or, in the Alternative, for Summary Judgment. Plaintiff did file a response to the motion on February 24, 2014. After Plaintiff failed to initiate the required Rule 16.3(b) pre-trial conference by March 17, 2014, Defendants urged the Court to consider this inaction when ruling on the motion to dismiss. On March 19, 2014, the Court ordered the case stayed pending the Court’s ruling on Defendants’ motion.

Dillon v. Antero Resources a/k/a Antero Resources Appalachain [sic] Corp. s/k/a Antero Resources Appalacia [sic], LLC; No. 2:11-cv-01038 (W.D. Pa. August 11, 2011) (originally filed in the Court of Common Pleas of Washington County, Pa., Case No. 2011-4813, July 18, 2011)

Becka v. Antero Resources a/k/a Antero Resources Appalachain [sic] Corp. s/k/a Antero Resources Appalacia [sic], LLC; No. 2:11-cv-01040 (W.D. Pa. August 12, 2011) ) (originally filed in the Court of Common Pleas of Washington County, Pa., Case No. 2011-4812, July 18, 2011)

The Dillon and Becka families (collectively, “Plaintiffs”) filed their lawsuits in the Court of Common Pleas of Washington County, Pennsylvania on July 18, 2011 (Case Nos. 4813 of 2011 G.D. and 4812 of 2011 G.D., respectively). These cases were then removed to federal court on August 12, 2011. Court-ordered mediation took place in each case on December 15, 2011, ending with no resolution. The Court consolidated both cases on April 25, 2012. Both cases have now settled, Dillon on August 9, 2012 and Becka on September 24, 2012.

According to the complaints, in early 2010, Defendant Antero Resources began drilling activities on property within 400 to 580 feet of Plaintiffs’ well water supplies. Plaintiffs claimed that Antero used hazardous chemicals during its hydraulic fracturing activities and that the use of such chemicals contaminated Plaintiffs’ groundwater.

30 See footnote #23, supra.

31

Plaintiffs asserted claims for negligence, absolute liability, and trespass; and sought injunctive relief to stop the drilling. In their negligence claim, the Plaintiffs set out 31 alleged negligent acts and omissions of the Defendants, including (1) injecting hazardous chemicals, compounds, or fluids into the earth in such a fashion as to damage Plaintiffs’ water supplies, the soil, and the environment; (2) failing to properly safeguard the groundwater and spring water; (3) failing to report or warn of spills and releases; (4) failing to prevent drilling mud and other contaminants from being discharged into erosion ditches near Plaintiffs’ homes and water wells; (5) failing to prevent run-off through Plaintiffs’ driveways and residence areas; (6) failing to comply with state statutes relating to safe drinking water and drilling activities; (7) failing to hire, train, manage, and supervise qualified professionals; and (8) failing to properly monitor the work being performed.

Plaintiffs sought damages for personal and property damage. Plaintiffs wanted compensation for their fear that their health had been compromised and that they might develop cancer or other serious illnesses. Plaintiffs also sought reimbursement for increased medical expenses, testing and monitoring of water and soil quality, emotional distress and inconvenience, contamination of their water and land, loss of property value, and loss of enjoyment and use of their land.

Scoggin v. Cudd Pumping Services, Inc., RPC Inc., and Cudd Energy Services, No. 4:11-cv- 00678-JMM (E.D. Ark. Sept. 12, 2011)

This is a lawsuit brought on behalf of two minor children, B. and H. Scoggin, by and through their next friend, Tina J. Scoggin (“Plaintiffs”) against Cudd Pumping Services, Inc., RPC Inc., and Cudd Energy Services (collectively, “Defendants”). Defendant Cudd Energy Services was dismissed without prejudice from the lawsuit on December 9, 2011.

In August of 2011, Defendants hydraulically fractured three natural gas wells which were located approximately 250 feet from the Plaintiffs’ home. Plaintiffs allege that, during the fracking process, large amounts of benzene, zylene, and methylene chloride were released into the environment, causing “dense clouds of a toxic mixture of atomized chemicals…” Air quality measurements taken in the Plaintiffs’ home revealed toxic levels of the chemicals.

Plaintiffs set out causes of action for strict liability, nuisance, trespass, and negligence, claiming that Defendants did not exercise reasonable care in their operations by allowing hazardous chemicals to migrate from the well sites without warning. As a result of Defendants’ activities, Plaintiffs “suffered severe and life threatening exposure to carcinogenic substances, as well as other toxic pollutants” that can cause Acute Myeloid Leukemia. Plaintiffs alleged that, because Acute Myeloid Leukemia can take up to ten years to fully manifest itself, the minors needed bi- annual monitoring for signs and symptoms. Plaintiffs sought $20,000,000 in compensatory damages, $50,000,000 in punitive damages, and the establishment of a medical monitoring fund. On June 10, 2013, a joint Stipulation of Voluntary Dismissal Without Prejudice was filed with the Court.

32

Beck v. ConocoPhillips Company, No. 2011-484 (Dist. Ct. Panola County Tex., Dec. 1, 2011)

Strong v. ConocoPhillips Company, No. 2011-487 (Dist. Ct. Panola County Tex., Dec. 2, 2011)

There are approximately 70 named Plaintiffs31 between these two lawsuits which were filed in Panola County, Texas in early December of 2011. Plaintiffs allege that Defendant ConocoPhillips has contaminated their water wells through its use of hydraulic fracturing to extract gas from the Haynesville Shale formation and by disposing of fracturing waste near Plaintiffs’ properties. Plaintiffs claim that their water wells intermittently smell bad, taste bad, and “give off a gas that they believe to be methane gas.” Upon receiving notice of the water problems, Defendant began providing potable water to the Plaintiffs, but Defendant has advised Plaintiffs that this practice will be stopped at some point in the future.32

Plaintiffs set out causes of action for nuisance, trespass, and negligence. Plaintiffs claim that “Defendant failed to use a reasonable alternative means of recovering the minerals pursuant to the accommodation doctrine.” They seek damages of $5,000,000 for loss of use of their land, loss of market value of their land, and loss of the intrinsic value of their well water. They also want damages for their “emotional harm and mental anguish from deprivation of enjoyment, loss of peace of mind, annoyance, inconvenience, and anxiety about the contaminated well water.” In addition, Plaintiffs have asked the Court for a permanent injunction precluding future drilling and fracking activities near Plaintiffs’ land.

Currently the parties are continuing with discovery. In both lawsuits, trial dates have been passed by agreement, with the cases being retained on the court’s docket.

Perna v. Reserve Oil & Gas, Inc., No. 11-c-2284 (Circuit Court of Kanawha County, West Virginia, Dec. 21, 2011)

Louis Perna (“Plaintiff”) owns forty acres on which Reserve Oil & Gas, Inc. (“Defendant”) operates a natural gas well. Plaintiff complains that the well was placed within 1,000 feet of his water well and that Defendant destroyed timber on his property when it constructed a road and installed a culvert. Plaintiff was forced to install a fence to prevent Defendant from using his property as a staging area and from depositing fracking fluid on his property. In addition, the fracking fluid was kept in two pits, one of which did not have a synthetic liner, and the pit waste was not fully reclaimed after completion of the well.

31 Plaintiffs’ Fourth Amended Complaint in the Beck case was filed on September 28, 2012, adding 10 plaintiffs and removing one (for a total of 67 plaintiffs). The Fifth Amended Petition filed on January 23, 2013, added one plaintiff. 32 In the Third Amended Complaint in the Beck case, Plaintiff Ada Smith alleges a cause action for fraud, claiming that she signed a release, releasing any damages caused to her water well. She alleges that she signed the release due to duress and coercion from Defendants’ agents who allegedly advised that the delivered water would be stopped if she did not sign.

33

Plaintiff wants the well leases to be declared unenforceable and asserts claims for negligence, prima facie negligence, trespass, unreasonable use, and nuisance. Plaintiff seeks property damages under the West Virginia Oil and Gas Production Damage Compensation Act as well as damages for mental anguish, emotional distress, annoyance and inconvenience, and economic loss.

Bartlett v. Frontier Gas Services, LLC, Crestwood Arkansas Pipeline, LLC, Kinder Morgan Treating, LP, and Chesapeake Energy Corporation, Case No 4:11-cv-0910 (E.D. Ark. Dec. 23, 2011)

This class action with 10 named plaintiffs was brought on behalf of all citizens, residents, and property owners who lived or owned property within a one mile radius of defendants’ Point Remove Compressor Station. Plaintiffs sought injunctive relief to stop defendants’ operation of the station which allegedly was causing pollution or contamination of the air, groundwater, and soil as well as creating “incessant and constant noise pollution.” Plaintiffs set out causes of action for strict liability, nuisance, trespass, and negligence. Each plaintiff requested compensatory damages of $1,000,000 and punitive damages of $5,000,000.

On March 5, 2012, the Court stayed this lawsuit pending a decision on class certification in the Ginardi case, supra. With the Ginardi court denying class certification on April 19, 2012, this lawsuit was re-opened and the Court entered a Scheduling Order. The parties filed a joint motion and stipulation of voluntary dismissal which the Court signed on September 17, 2012.

Teekell v. Chesapeake Operating, Inc., Crow Horizons Company, JPD Energy, Inc., and Chesapeake Louisiana, L.P., No. 5:12-cv-00044 (W.D. La. Jan. 12, 2012) (originally filed in the First District Court of Caddo Parish, La., Cause No. 555,703, Dec. 6, 2011)

Scott and Patricia Teekell (“Plaintiffs”) filed their Petition for Injunctive Relief and Damages in the First Judicial District Court of Caddo Parish, Louisiana (Cause No. 555,703) on December 6, 2011. On the basis of diversity, the case was removed to federal court on January 12, 2012, by Defendant Chesapeake Operating, Inc. (the unit operator), with allegations that the other defendants (Crow Horizons Company, JPD Energy, Inc., and Chesapeake Louisiana, L.P.) were fraudulently joined.

On June 6, 2012, the Court denied Plaintiffs’ motion to remand and dismissed all claims against Chesapeake Louisiana, JPD Energy, and Crow Horizons stating that these defendants were not properly joined to the lawsuit.

Plaintiffs alleged that the groundwater beneath their property was contaminated as a result of Defendant Chesapeake Operating, Inc.’s natural gas drilling and production operations on adjacent property. Plaintiffs had two water wells on their property. The first water well was replaced with a new well in 2010. In January of 2011, after noticing a bad taste in the water

34

from the new well, Plaintiffs had the water tested. The water was found to have high concentrations of sodium salts and iron, as well as dissolved solids at over twice the suggested maximum contaminant level set by the EPA. At that point, Plaintiffs went back to using their original well. In November of 2011, the water from this well began to smell and Plaintiffs determined that the well was holding hydrogen sulfide gas.

Plaintiffs asserted that Defendants were “liable under a number of theories including general negligence…and the obligations of neighborhood.” Plaintiffs sought damages for the loss of use of their water wells, loss of usable water, costs to obtain a usable water supply, inconvenience, and mental anguish. In addition, Plaintiffs asked the Court for an injunction to stop Defendants’ activities.

On August 20, 2012, the Court signed an order in which the parties agreed to the entry of a “Lone Pine” order33 whereby Plaintiffs “will attempt to make a prima facie case as to causation through expert witnesses prior to engaging in full discovery.” The Plaintiffs advised the Court on January 29, 2013 that they had run “into difficulty with the selection and hiring of expert witnesses. The Court extended the dates for “Lone Pine” discovery. All this became moot when the lawsuit was voluntarily dismissed on June 25, 2013.

Mangan v. Landmark 4, LLC, No. 1:12-cv-00613 (N.D. Ohio, March 12, 2012)

Boggs v. Landmark 4, LLC, No. 1:12-cv-00614 (N.D. Ohio, March 12, 2012)

Plaintiffs Mark and Sandra Mangan and William and Stephanie Boggs (“Plaintiffs”) filed their Complaints on March 12, 2012, alleging that Defendant Landmark 4, LLC (“Landmark”) had contaminated their properties and persons with toxic, carcinogenic, and ultra-hazardous materials by releasing, spilling, or discharging these materials during hydraulic fracturing on wells located within 2,502 feet of Plaintiffs’ property, homes, and water well supplies.

Seeking injunctive relief to prevent continuing and future contamination, Plaintiffs assert causes of action for medical monitoring, negligence, strict liability, private nuisance, unjust enrichment, negligence per se, battery, and intentional fraudulent concealment. Defendant filed motions to dismiss several of Plaintiffs’ causes of action. On August 13, 2012, the Court dismissed Plaintiffs’ claims for battery and intentional fraudulent concealment; and on March 11, 2013, the Court dismissed Plaintiffs’ claim for negligence per se.

In the unjust enrichment claim, Plaintiffs state that Landmark has been unjustly enriched by its acts and omissions in causing contaminants to enter their properties. “These acts and omissions allowed Defendant to save millions of dollars in costs that should have been expended to properly contain and control the substances emanating from their facility.”

33 See footnote #23, supra.

35

On August 13, 2012, the Court denied Defendants’ request for a “Lone Pine” order,34 stating that “at this stage of the proceedings…there are no extraordinary circumstances that would render the normal discovery and motion practice procedures insufficient in this case.”

Expert discovery is due by April 30, 2014, dispositive motions filed by May 30, 2014, and responses and replies due by June 30, 2014 and July 14, 2014, respectively. A status conference is scheduled for May 22, 2014.

Manning v. WPX Energy Inc. and The Williams Companies, Inc., et al., No. 3:12-cv-00646 (M.D. Pa. April 9, 2012)

Tammy Manning, Matthew Manning, Bryanne Burton, Amada Grondin, and Robert Lee, Jr. (“Plaintiffs”) filed their complaint on April 9, 2012. The Court immediately issued an order requiring Plaintiffs to amend their complaint to properly allege diversity jurisdiction. An amended complaint was filed on May 3, 2012, but once again the Court ordered Plaintiffs to properly allege diversity jurisdiction. The Second Amended Complaint filed on May 17, 2012 was accepted by the Court. On October 3, 2013, Plaintiffs filed their Third Amended Complaint, adding WPX Energy Appalachia, LLC as a defendant. A Case Management Order has been entered, with trial scheduled for January 2015.

Plaintiffs complain that, beginning in March 2011, Defendants engaged in drilling and hydraulic fracturing at 15 wells, with well pads within 1,000 to 7,390 feet of Plaintiffs’ properties, homes, and water supplies. They argue that, because their water supplies are contaminated, they are exposed to hazardous chemicals, their property values have decreased, and they have lost the use and enjoyment of their properties.

Causes of action include violations of the Hazardous Sites Cleanup Act, negligence, private nuisance, strict liability, trespass, and medical monitoring trust funds. In the negligence claim, Plaintiffs accuse Defendants of failing to prevent and/or contain releases and migration of hazardous chemicals and combustible gases, and failing to prevent contamination of the water supplies. Plaintiffs seek compensatory and punitive damages for remediation, loss of property value, loss of use and enjoyment of their property, loss of quality of life, emotional distress, inconvenience, and discomfort in an unspecified amount.

Prior to filing their lawsuit, in December 2011, the Mannings complained to the Pennsylvania Department of Environmental Protection (PDEP) about their water supply containing methane. The PDEP launched an investigation to determine the source of the methane. The PDEP tested the water wells and compared it with the chemical make-up of natural gas samples taken from near-by drilling rigs and also with samples from water wells in the near-by Salt Springs State Park. In April 2013, the PDEP released the testing results. The testing showed that the methane

34 See footnote #23 supra.

36

in the water of the private wells contained a similar isotopic make-up to the samples from the State Park, indicating that the methane in the wells is naturally occurring shallow gas. The PDEP concluded that the methane in the private wells was not production gas from the near-by gas wells being drilled by WPX Energy.

Despite the conclusion of the PDEP, the Mannings are continuing their lawsuit and filed an appeal of the PDEP’s determination (Environmental Hearing Board Docket No. 2013-067-M) on May 29, 2013. On February 26, 2014, the PDEP ordered the Mannings to reply to all outstanding discovery by no later than April 28, 2014.

Roth v. Cabot Oil and Gas Corporation and Gas Search Drilling Services Corporation, No. 3:12-cv-00898 (M.D. Pa. May 14, 2012) (originally filed in the Court of Common Pleas of Susquehanna County, Pa., Case No. 2012-324, March 19, 2012)

Plaintiffs Frederick and Debra Roth filed their lawsuit on March 19, 2012, in the Court of Common Pleas of Susquehanna County, Pennsylvania, Case No. 2012-324. The case was removed to federal court on May 14, 2012.

Plaintiffs complained of environmental contamination and pollution caused by releases, spills, and discharges of combustible gases, hazardous chemicals, and industrial wastes from Defendants’ oil and gas facilities and their drilling and exploration activities, including hydraulic fracturing. According to Plaintiffs, these releases, spills, discharges, and activities damaged the natural resources in and around their home, including the contamination of their drinking water supply.

In their First Amended Complaint filed on August 6, 2012, Plaintiffs set out nine causes of action: (1) Hazardous Sites Cleanup Act; (2) negligence; (3) negligence per se, (4) private nuisance, (5) strict liability, (6) trespass, (7) inconvenience and discomfort, (8) breach of contract, and (9) fraudulent misrepresentation, with the last two against Defendant Cabot Oil and Gas Corporation (“Cabot”). For breach of contract, Plaintiffs alleged that Cabot failed to perform in accordance with lease provisions by not conducting their operations as required by state regulations, not taking the necessary steps to return Plaintiffs’ water supply to pre-drilling conditions, and not constructing the wells in a manner which would minimize soil erosion. On January 30, 2013, the Court dismissed Plaintiffs’ claims of trespass, inconvenience and discomfort, and fraudulent misrepresentation.

On December 12, 2013, the court signed a Rule 54(b) Final Judgment, dismissing the lawsuit with prejudice.

37

Haney, et al v. Range Resources Appalachia, LLC., et al., No. 2012-3534 (Pa. Ct. Com. Pl., May 25, 2012)

The 180+ page complaint was filed by three families against 17 defendants,35 including the drilling operator, the manufacturers of the impoundment pond liners, the suppliers of fracking fluids, the engineers who constructed the well sites, the companies that tested the drinking water supplies, and the trucking companies who transported water to and waste water away from the wells. This case is one of the first to name as defendants the operator and/or driller and the supporting supply and service companies for the well and hydraulic fracturing activities.

The causes of action include strict liability, negligence, negligent and intentional infliction of emotional distress, battery, private nuisance, trespass, Medical Monitoring Trust Fund, violations of Hazardous Sites Clean Up Act, professional liability against the engineering companies and individuals, civil conspiracy, and fraud. The last two claims of civil conspiracy and fraud are against Range Resources Appalachia, LLC (“Range Resources”) and the two companies that were taking water samples at Plaintiffs’ homes. Plaintiffs allege that the water reports were modified to intentionally provide incomplete information so that Range Resources could continue its fracking operations.

Despite objections from the Haney Plaintiffs, on June 26, 2013, the Pennsylvania Department of Environmental Protection (PDEP) issued permits to Range Resources Corporation, allowing the company to begin hydraulic fracturing operations at two wells in Washington County. The Plaintiffs filed an appeal of the PDEP’s decision on July 25, 2013. In the Notice of Appeal (Haney, et al v. Pennsylvania Department of Environmental Protection, Case No. 2013-112, before the Pennsylvania Environmental Hearing Board), the landowners claim that the PDEP is conducting on-going investigations into violations at the site of the operating well which was drilled in 2009. These alleged violations include a series of spills, contamination of drinking water sources, and numerous leaks in 2010 and 2011 from an impoundment used to store water, drilling fluids, and other chemicals. The landowners argue that the Pennsylvania Oil and Gas Act allows for the denial of a permit where the operators have previously been found to have violated environmental regulations, and they point to an April 2010 notice of violation issued to Range for failing to properly control or dispose of drilling fluids and violations at other drilling sites. They also claim that Range’s applications for the permits were incomplete. The landowners seek a reversal of the PDEP’s permits “as [being] arbitrary and capricious and as an abuse of discretion.” The PDEP has scheduled a hearing for October 21, 2014.

35 Range Resources Appalachia, LLC.; Carla L. Suszkowski, P.E., individually and on behalf of Range Resources Appalachia, LLC.; The Gateway Engineers, Inc.; Scott Rusmisel, P.E., individually and on behalf of The Gateway Engineers, Inc.; New Dominion Construction, Inc.; Terrafix Environmental Technology, Inc.; Skaps Industries, Inc.; Engineered Synthetic Products, Inc.; Red Oak Water Transfer NE, LLC.; Microbac Laboratories, Inc.; Multi-Chem Group, LLC; Universal Well Services, Inc.; Halliburton Energy Services, Inc.; Saxon Drilling, L.P.; Highland Environmental, LLC; EAP Industries, Inc.; and Test America, Inc.

38

Butts, et al. v. Southwestern Energy Production Company, No. 3:12-cv-01330 (M.D. Pa. July 10, 2012)

Three families brought this lawsuit, complaining that the use and enjoyment of their vacation homes in Susquehanna County, Pennsylvania have been destroyed by Southwestern Energy Production Company’s (“Southwestern”) drilling and hydraulic fracturing activities. Plaintiffs set out causes of action for private nuisance and negligence and seek a permanent injunction to stop unreasonable drilling activities. These unreasonable drilling activities include mobilizing heavy equipment, maintaining a constant flow of truck traffic day and night, using large flood lights, drilling, fracking, blasting, and low-level flying of helicopters over their homes. These activities have caused deforestation, dust, high decibel noises, high pressure venting noises, and loud gas flaring that emits air pollutants. Plaintiffs’ well water is no longer safe for drinking, cooking, and other residential uses. They can no longer enjoy the peace and serenity of their vacation homes and have seen the value of their homes decrease.

Southwestern filed a motion to dismiss on September 10, 2012, asserting that each of Plaintiffs’ claims is flawed and barred by Pennsylvania’s economic loss rule. In particular, Southwestern asserted that Plaintiffs have not alleged a cause of action for private nuisance and have not properly plead causation. This motion was denied on May 14, 2013.

Currently pending before the court are two motions filed by Southwestern, a motion for summary judgment and a motion to strike the expert reports and testimony of Joseph C. Fisher.

Smith, et al v. Southwestern Energy Company, No. 4:12-cv-00423 (E.D. Ark., July 11, 2012)

William and Margaret Smith (the “Smiths”) sued Southwestern Energy Company in connection with the Puma North Compressor Station, which is located about 900 feet from their home. At the station, compressor units powered by engines gather, treat, and recompress natural gas produced by hydraulic fracturing operations to ensure the gas’ continued flow through the pipeline. The Smiths complain of noise, vibration, and emissions from the compressor station and assert causes of action for strict liability, nuisance, trespass, and negligence.

In a Second Amended Complaint filed on January 14, 2013, seven plaintiffs36 and several claims relating to royalty payments were added. These royalty claims included: (a) breach of statutory duty of good faith to correctly pay royalties associated with the production of natural gas; (b) unfair and deceptive trade practices by knowingly withholding information concerning royalty calculations; and (c) unjust enrichment.

36 Actually fifteen plaintiffs were added, eight of which were complaining about the Scotland CPF II, not the Puma North Compress Station. The Court ordered these Scotland CPF II plaintiffs removed from the Smith lawsuit. Counsel for these Scotland CPF II plaintiff filed a separate lawsuit, Pruitt v. Southwestern, infra.

39

The Smiths sought $2,500,000 for compensatory damages (loss of use and enjoyment of their property, soil and groundwater contamination, physical damage to property as a result of vibration, diminution in property value, personal injuries, and severe mental distress, annoyance and discomfort) per household and $5,000,000 in punitive damages per household.

On February 19, 2013, SEECO Inc., a wholly owned subsidiary of Southwestern and a citizen of Arkansas, filed a motion to intervene, arguing that it was the lessor and the party responsible for the payment of royalties. The Smiths filed a Third Amended Complain which did not include SEECO on April 8, 2013. Southwestern then filed a motion to dismiss for lack of subject matter jurisdiction. On May 13, 2013, the Court ruled that the case could not proceed without joinder of SEECO, the non-diverse, necessary party. Because the joinder of that party would destroy diversity, the Court dismissed the case for lack of subject matter jurisdiction.

Hill, et al. v. Southwestern Energy Company, et al., No. 4:12-cv-00500 (E.D. Ark., Aug. 10, 2012)

This class action lawsuit was filed on August 10, 2012, with two plaintiffs against Southwestern Energy Company (“Southwestern”). On October 4, 2012, the complaint was amended to add thirteen plaintiffs (nine families total) and to add Chesapeake Energy and XTO Energy, Inc. as defendants. According to Plaintiffs, Defendants have injected fracking flowback and other oilfield waste fluids into vertical wells drilled into rock formations both above and below the Fayetteville Shale. Plaintiffs complain that this fluid flows out horizontally and is permanently deposited into the rock formation. There are several oilfield waste disposal wells in the vicinity of their residences.

Plaintiffs assert causes of action for RICO and Arkansas Deceptive Trade Practices Act (DTPA) violations, fraud, civil conspiracy, strict liability, contract-based claims, conversion, trespass, and unjust enrichment. In an order dated September 26, 2013, the court dismissed the RICO and DTPA claims, the good faith and fair dealing breach of contract claim, and the claims for fraud, civil conspiracy, strict liability, and conversion.

Plaintiffs seek damages for loss of use and enjoyment of their property, for contamination, disturbance and dislocation of their property, for severe diminution in property value, and for the creation of a toxic waste site on their property. Each plaintiff family seeks $2,000,000 in compensatory damages and $15,000,000 in punitive damages.

On November 6, 2013, Southwestern filed a motion for joinder of SEECO (an Arkansas corporation which is a wholly owned subsidiary of Southwestern) as a required party, arguing that SEECO primarily or exclusively performs the activities about which Plaintiffs complain. On December 10, 2013, the court agreed with Southwestern that SEECO must be joined to the lawsuit and asked that the parties come to the December 19, 2013 status conference prepared to

40

discuss “whether the Court must decline to exercise jurisdiction under 28 U.S.C. § 1332(d)(4)(A) or § 1332(d)(4)(B) or should decline under § 1332(d)(3).”

Plaintiffs amended their complaint on January 10, 2014 to include SEECO, Inc. as a defendant, alleging jurisdiction under the Class Action Fairness Act because “minimal diversity exists between the parties, there are at least 100 members of the putative class, and the amount in controversy exceeds $5,000,000…” Plaintiffs also added a claim for intentional and reckless conduct which the defendants asked the court to dismiss. The court ruled that that claim “may stand in service of the potential exemplary damages. Those allegations, though, are not acceptable as a belated new claim. About eighteen months in, we’ve finally got this lawsuit focused. It needs to stay focused [on trespass and unjust enrichment].”

On December 20, 2013, the court issued a scheduling order with “phase one discovery produced” due by February 3, 2014 and a trial setting of April 6, 2015.

Pruitt, et al v. Southwestern Energy Company, No. 4:12-cv-00690 (E.D. Ark., Nov. 2, 2012)

The eight Plaintiffs in this lawsuit sued Southwestern Energy Company in connection with the Scotland CPF II Compressor Station.37 This compressor station is used to gather, treat, and transport the shale gas that is produced through the hydraulic fracturing process. As in the Smith v. Southwestern case, supra., the Plaintiffs complained of noise, vibration, and emissions from the compressor station and asserted causes of action for strict liability, nuisance, trespass, and negligence. Six of the Plaintiffs also alleged unjust enrichment and unfair deceptive trade practices relating to the payment and calculation of royalties.

Plaintiffs sought $3,000,000 per household for compensatory damages (loss of use and enjoyment of their property, soil and groundwater contamination, physical damage to property as a result of vibration, diminution in property value, personal injuries, and severe mental distress, annoyance and discomfort) and $5,000,000 per household in punitive damages. As in the Smith v. Southwestern case, supra., the Court found that the lawsuit could not proceed without the joinder of the non-diverse, necessary party. Because the joinder of that party would destroy diversity, the Court dismissed the case for lack of subject matter jurisdiction on May 14, 2013.

Magers, et ux v. Chesapeake Appalachia, L.L.C., CNX Gas Company, L.L.C., and Columbia Gas Transmission, L.L.C., No. 5:12-cv-00049-FPS (N.D. W.Va., Sept. 4, 2012)

Jeremiah and Andrea Magers (“Plaintiffs”) allege that the oil and gas operations of Chesapeake Appalachia, L.L.C. (“Chesapeake”), CNX Gas Company, L.L.C. (dismissed on August 13,

37 This lawsuit was filed as a direct result of Smith v. Southwestern Energy Company, supra. On August 27, 2012, the Smiths amended their complaint to add fifteen plaintiffs, including the eight now in the Pruitt lawsuit. Ruling on a motion to sever filed by Southwestern, the Court in Smith ordered the eight Scotland CPF II Compressor Station plaintiffs to file a separate lawsuit, which is this Pruitt case.

41

2013), and Columbia Gas Transmission, L.L.C (“Columbia Gas”) contaminated their water well with methane gas. Chesapeake drilled Marcellus gas wells on land near or adjacent to the acreage where Plaintiffs’ water well was located. Columbia Gas drilled several gas storage wells near or adjacent to that same acreage.

Plaintiffs assert a cause of action for negligence, arguing that Chesapeake and Columbia Gas released methane gas and other contaminants into their water well and into Fish Creek while constructing the gas wells and during the processes of producing gas from those wells. They have been forced to purchase and haul water from third parties to their home to supply their needs. Plaintiffs seek damages for diminution in the value of their property.

Pending before the Court is Columbia Gas’ motion for summary judgment based on Plaintiffs’ failure “to establish with relevant evidence that Columbia is more likely than not the cause of methane gas in Plaintiffs’ water supplies.” On December 16, 2013 and on January 7, 2014, Plaintiffs agreed to dismiss their claims for gross negligence and statutory violations against Columbia Gas, leaving only the negligence claim.

Scoggin, et al v. Southwestern Energy Company, No. 4:12-cv-763 (E.D. Ark., December 7, 2012)

This class action lawsuit was filed by the Scoggin family38 on behalf of all residents and property owners who live or own property within a 500 foot radius of any drilling/hydraulic fracturing operation being performed by Southwestern Energy Company (“Southwestern”). The action is brought against Southwestern for allowing its drilling/fracking operations to allegedly cause a noxious and harmful nuisance, contamination, physical harm, trespass, property damage, and diminution of property values. Plaintiffs seek $10,000,000 in compensatory damages and $15,000,000 in punitive damages. Southwestern has filed a Motion to Dismiss for Failure to State A Claim and Motion for More Definite Statement, seeking dismissal of all Plaintiffs’ claims of alleged contamination of their cistern, dismissal of the strict liability claim, and a more definite statement of all remaining claims. The Court denied the motion to dismiss and for more definite statement on March 15, 2013.

On March 29, 2013, Southwestern filed a motion for joinder of SEECO (a wholly owned subsidiary of Southwestern) as a required party, arguing that SEECO primarily or exclusively performs that activities about which Plaintiffs complain. The Court agreed with Southwestern and ordered that SEECO be joined to the lawsuit. Because SEECO is a citizen of Arkansas, its joinder to the lawsuit destroyed diversity. The Court dismissed the lawsuit without prejudice on May 29, 2013.

38 See Scoggin v. Cudd Pumping Services, Inc., et al., supra.

42

Ramsey, et al. v. Desoto Gathering Company, LLC, Case No. 23CV-14-258, In the Circuit Court of Faulkner County, Arkansas for the 20th Judicial District (April 24, 2014)

In the Circuit Court of Faulkner County, Arkansas, on April 24, 2014, eight families who live near compressor stations operated by Desoto Gathering Company sued that company, alleging the emission of “huge amounts of methane and hydrogen sulfide, as well as other flammable, malodorous and noxious gases, chemicals and compounds, directly into the air.” In addition, these families assert that the compressor stations “are injuriously loud and produce harmful levels of noise and toxic emissions” and that they have been harmed by the noise, vibration, odor and pollution.

Having purchased their property many years ago because it was in a rural, non-industrial setting, the families allege that they were not consulted when the compressor stations were built nor when the stations were enlarged. The families claim that their “homes are within the blast/impact zone of the Midge 2 [and Scotland CPF 2] compressor station[s], the area which is likely to be impacted in the event the massive amounts of explosive natural gas or other flammable hydrocarbons on-site were to explode or catch fire.”

Stating causes of action for strict liability and negligence, each of seven families seeks $3 million for compensatory damages and $5 million in punitive damages (with one family seeking $8 million and $12 million, respectively, claiming exacerbation of the husband’s post-traumatic stress disorder diagnosed by the Department of Veterans Affairs) for discomfort resulting from the company’s activities and for personal injuries resulting from the noise and vibration of the compressor stations.

This lawsuit was filed two days after a $2.925 million verdict in Dallas, Texas for nuisance damages arising from the drilling activities of a natural gas company. See Parr lawsuit, supra.

The eight families in this lawsuit were severed from a class action lawsuit now in federal court, Ramsey, et al. v. Desoto Gathering Company, LLC, et al., Case No. 4:13-cv-00626-BRW, In the U.S. District Court for the Eastern District of Arkansas, Western Division, on March 27, 2014. The Court severed these families because the class action was not based on claims arising from the Midge CPF-2 and Scotland CPF-2 compressor stations, but rather on another compressor station.

43

Litigation Involving Earthquakes and Hydraulic Fracturing

On March 23, 2011, Jacob Sheatsley39 filed a class action lawsuit claiming that “Central Arkansas has seen an unprecedented increase in seismic activity, occurring in the vicinity of” wastewater disposal injection wells40. According to the Arkansas Geological Survey, there had been 599 seismic events in Guy, Arkansas between September 20, 2010 and the date of the lawsuit. The largest earthquake in 35 years occurred on February 28, 2011, and measured 4.7 in magnitude. On that same day, the U.S. Geological Survey recorded as many as 29 earthquakes around Greenbrier and Guy, Arkansas, that ranged in magnitude from 1.7 to 4.7.41 Mr. Sheatsley alleged causes of action for public nuisance, private nuisance, absolute liability, negligence, and trespass, all based on the interference with the use and enjoyment of his property and on the risk of serious personal harm and property damage from the earthquakes.

In May 2011, four additional class action complaints with the same allegations were filed in state court and then removed to federal court.42 With these additional filings, on July 13, 2011, Mr. Sheatsley voluntarily dismissed his lawsuit, in “an effort to streamline these cases and further judicial economy.” On August 31, 2011, all four lawsuits were consolidated under Case No. 4:11-cv-00474, Hearn v. BHP Billiton Petroleum (Arkansas) Inc., et al.

Since the consolidation, there have been changes to both plaintiffs and defendants, some being dismissed and others being added.43 On December 15, 2011, plaintiffs filed their First Amended and Consolidated Class Action Complaint, adding Deep Six Water Disposal Services, LLC (“Deep Six”) as a defendant and expanding their claims to include damages for (1) physical

39 Sheatsley v. Chesapeake Operating, Inc. and Clarita Operating, LLC, Cause No. 2011-28, In the Circuit Court of Perry County, Arkansas 16th Division, removed to the U.S. District Court for the Eastern District of Arkansas, Western Division, Case No. 4:11-cv-00353-JLH, on April 4, 2011; closed on July 13, 2011. 40 See U.S. EPA Technical Program Overview: Underground Injection Control Regulations, rev. July 2001, for information relating to injection wells. 41 This earthquake information is referenced in the Sheatsley Class Action Complaint. See also Arkansas Geological Survey’s Earthquake Master List, found at www.geology.arkansas.gov/xl/Earthquake_Archive.xls and U.S. Geological Survey found at http://earthquake.usgs.gov/earthquakes/recenteqsus/. 42 Frey v. BHP Billiton Petroleum (Arkansas) Inc., et al., Case No. 23CV-11-488, In the Circuit Court of Faulkner County, Arkansas, 2nd Division (May 23, 2011), removed to the U.S. District Court for the Eastern District of Arkansas, Western Division, Case No. 4:11-cv-0475-JLH, on June 9, 2011; closed August 31, 2011. Hearn v. BHP Billiton Petroleum (Arkansas) Inc., et al, Case No. 23CV-11-492, In the Circuit Court of Faulkner County, Arkansas, 2nd Division (May 24, 2011), removed to the U.S. District Court for the Eastern District of Arkansas, Western Division, Case No. 4:11-cv-00474-JLH, on June 9, 2011; closed on August 29, 2013. Lane v. BHP Billiton Petroleum (Arkansas) Inc., et al, Case No. 23CV-11-482, In the Circuit Court of Faulkner County, Arkansas, 3rd Division (May 20, 2011), removed to the U.S. District Court for the Eastern District of Arkansas, Western Division, Case No. 4:11-cv-00477-JLH, on June 9, 2011, closed August 31, 2011. Palmer v. BHP Billiton Petroleum (Arkansas) Inc., et al, Case No. 23CV-11-491, In the Circuit Court of Faulkner County, Arkansas, 3rd Division, Case No. 4:11-cv-00476-JLH, on June 9, 2011, closed on August 31, 2011. 43 On September 15, 2011 and on November 1, 2011 respectively, defendants Clarita Operating LLC and BHP Billiton Petroleum (Arkansas) Inc. were dismissed. Plaintiffs Sam and April Lane and plaintiffs Randy and Joyce Palmer dismissed their claims on November 18, 2011; and Peggy Freeman, Tony and Karen Davis, and Jason and Misty Spiller were added as plaintiffs.

44

damage to their homes and commercial real estate; (2) losses attributable to the purchase of earthquake insurance; (3) losses in the fair market value of their real estate; (4) economic loss due to temporary stoppage of business operations; and (5) emotional distress.

On May 4, 2012, defendant Deep Six filed a motion for summary judgment, arguing plaintiffs’ inability to sustain their burden of proof regarding causation. Deep Six pointed to testimony from seismologist Dr. Haydar Al-Shukri before the Arkansas Oil & Gas Commission who stated that the seismic events were not caused by hydraulic fracturing.44 On June 25, 2012, plaintiffs voluntarily dismissed Deep Six.

Another earthquake lawsuit was filed on March 11, 2013,45 and three more were filed on April 1, 2013.46 The Court has tentatively set a separate trial date for each case beginning in the fall of 2014. The plaintiffs claim property damage to their homes “due to defendants’ disposal well operations, which caused thousands of earthquakes in mini-clusters and swarms in central Arkansas in 2010 and 2011.” They allege causes of action for public nuisance, private nuisance, absolute liability, negligence, trespass, Deceptive Trade Practices, and outrage. They seek compensation for physical damage to their homes (cracking or separation in concrete, tiles, walls, ceilings, brick facings, and hardwood floors; the un-leveling of foundations; doors that will not properly close; and cracks in swimming pool), losses in the fair market value of their real estate, and emotional distress.

The Hearn case proceeded as a class action until April 9, 2013 with the filing of the Second Amended and Consolidated Complaint when all class action allegations were dropped. Because of settlements with some Hearn plaintiffs, the Court transferred and consolidated the claims of the remaining plaintiffs with the claims in the Mahan lawsuit (Case No. 4:13-cv-00184-JLH).

On October 17, 2013, the Mahan lawsuit was referred to the U.S. Magistrate Judge for a settlement conference. On January 6, 2014 and on January 9, 2014 respectively, an Amended Complaint was filed in the Sutterfield lawsuit (Case No. 4:13-cv-0183-JLH) and the Mahan lawsuit. In late February, in both cases, defendants Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC each filed third-party complaints against Clarita Operating LLC – Arkansas and Deep-Six Water Disposal Services, LLC., asserting that “if any well caused

44 For Dr. Al-Shukri’s testimony, see Exhibit C to Deep Six’s Statement of Material Facts As to Which There is No Genuine Issue to Be Tried judgment [Docket #63, Case No. 4:11-cv-00474] which was filed with the motion for summary. 45 Miller v. Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC, No. 4:13-cv-131-JMM (E.D. Ark., March 11, 2013). 46 Thomas v. Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC, No. 4:13-cv-182-JLH (E.D. Ark., April 1, 1013). Sutterfield v. Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC, No. 4:13-cv-183-JLH (E.D. Ark., April 1, 1013). Mahan v. Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC, No. 4:13-cv-184-JLH (E.D. Ark., April 1, 1013).

45

Damages to Plaintiffs, it was the Clarita Well and the Deep-Six Well,” both of which are “deeper than the wellbore of the wells described in Plaintiff’s Complaint.”

On March 6, 2014, the court granted the Mahan and Sutterfield plaintiffs’ motion to dismiss emotional distress claims. On March 20, 2014, the Mahan and Sutterfield plaintiffs filed a motion for voluntary dismissal.

Two new lawsuits47 involving the Arkansas swarm of earthquakes was filed in February 2014. Pointing to the wastewater disposal wells in Faulkner County, the plaintiffs48 assert causes of action for public nuisance, private nuisance, absolute liability, negligence, trespass, deceptive trade practices, and outrage.

On July 30, 2013, four residents of Alvarado, Johnson County, Texas filed a class action lawsuit alleging that their homes were damaged by earthquakes caused by hydraulic fracturing.49 These plaintiffs claim that the defendant oil and gas companies’ fracking and injection well operations caused “earthquakes, ground subsidence and other seismic activity” on their property. According to plaintiffs, the injection of drilling wastewater into underground disposal wells can enter a fault, causing slippage and earthquakes. Setting out causes of action for negligence, nuisance, and strict liability, the plaintiffs seek actual and exemplary damages in undisclosed amounts.

Studies Concerning Possible Connections between Earthquakes and Fracking

Before the lawsuits were filed, in December 2010, the Arkansas Oil & Gas Commission (“AOGC”) Staff was concerned about a possible connection between hydraulic fracturing and the unusual seismic activity in Arkansas. The Staff requested that the AOGC establish an immediate moratorium on any new or additional disposal wells in certain counties.50 Shortly after the large earthquakes in February 2011, the AOGC had a special hearing and ordered the cessation of disposal wells operated by Clarita Operating LLC and Chesapeake Operating, Inc51

47 2010-2011 Guy-Greenbrier Earthquake Swarm Victims v. Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC, Case No. 23CV-14-84, In the Circuit Court of Faulkner County, Arkansas, 1st Division, February 11, 2014 (dismissed with prejudice on March 31, 2014); and Davis, et al. v. Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC, Case No. 4:14-cv-81 JLH (E.D. Ark., February 12, 2014) (dismissed with prejudice on March 20, 2014). 48 Of the 24 plaintiffs in the 2010-2011 Guy-Greenbrier Earthquake Swarm Victims lawsuit, five previously filed lawsuits: Sam and April Lane, Randy and Joyce Palmer, and Jacob Sheatsley. 49 Finn v. EOG Resources, Inc., et al, Cause No. C2013-00343, In the 18th Judicial District Court of Johnson County, Texas. 50 Letter dated December 2010 from director Lawrence Bengal to the Commissioners of the Arkansas Oil & Gas Commission regarding amended request for an immediate moratorium on any new or additional Class II disposal well or Class II disposal well in certain areas (Faulkner, Conway, Van Buren, Cleburne and White counties). See http://www.aogc2.state.ar.us/Hearing%20Applications%20Archive/2010/December/602A-2010-12.pdf. 51 Order No. 602A-2010-12, February 8, 2011, Class II Commercial Disposal Well or Class II Disposal Moratorium, available at http://www.aogc2.state.ar.us/Hearing%20Orders/2011/Jan/602A-2010-12.pdf; see also Edward McAllister, Avoiding Fracking Earthquakes May Prove Expensive, Scientific American (Jan. 3, 2012),

46

In July 2011, the AOGC held a hearing and determined that there was sufficient documentary and expert witness52 proof to order a moratorium on drilling disposal wells in the earthquake area.53

Other organizations besides the AOGC have been studying the possible connections between drilling and earthquakes. In August 2011, the Oklahoma Geological Survey (“OGS”) drafted an Open-File Report entitled “Examination of Possibly Induced Seismicity from Hydraulic Fracturing in the Eola Field, Garvin County, Oklahoma.” 54 This group concluded that

[D]etermining whether or not earthquakes have been induced [by drilling] …is problematic, because of our poor knowledge of historical earthquakes, earthquake processes and the long recurrence intervals in the stable continent. In addition, understanding fluid flow and pressure diffusion in the unique geology and structures of an area poses real and significant challenges… The number of historical earthquakes in the area and uncertainties in hypocenter locations make it impossible to determine with a high degree of certainty whether or not hydraulic fracturing induced these earthquakes.55

A study was commissioned by Cuadrilla Resources Ltd. to evaluate the relationship between Cuadrilla’s operations and two small earthquakes that occurred in Lancashire, United Kingdom, in April 2011.56 The group concluded that the probability of a single factor, such as hydraulic

available at http://www.scientificamerican.com/article.cfm?id=avoiding-fracking-earthquakes-expensive; see also http://www.intellectualtakeout.org/library/articles-commentary-blog/avoiding-fracking-earthquakes-expensive- venture. 52 Researchers with the Arkansas Geological Survey say that, while there is no discernible link between earthquakes and gas production, there is “strong temporal and spatial” evidence for a relationship between the Arkansas earthquakes and the injection wells. Campbell Robertson, “A Dot on the Map, Until the Earth Started Shaking,” N.Y. Times, Feb. 5, 2011, found at http://www.nytimes.com/2011/02/06/us/06earthquake.html?pagewanted=all&_r=0. Dr. Haydar al-Shukri, director of the Arkansas Earthquake Center at the University of Arkansas testified before the Commission that, because only 280 of the more than 10,000 small seismic events occurred within three miles of the well, these events were not caused by hydraulic fracturing. See http://apps.americanbar.org/litigation/committees/energy/articles/spring2012- 0512-frackings-alleged-links-water-contamination-earthquakes.html. 53 “Natural Gas: Arkansas Commission Votes to Shut Down Wells,” HuffPost Green, July 27, 2011; Order No. 180A-2-2011-07, August 2, 2011, Class II Commercial Disposal Well or Class II Disposal Moratorium, found at http://www.fossil.energy.gov/programs/gasregulation/authorizations/Orders_Issued_2012/64._AOGC_Hearing.pdf 54 Holland, “Examination of Possibly Induced Seismicity from Hydraulic Fracturing in the Eola Field, Garvin County, Oklahoma,” Oklahoma Geological Survey, Open File Report OF-1 2011, available at http://www.ogs.ou.edu/pubsscanned/openfile/OF1_2011.pdf. This report examined 43 earthquakes occurring in the Eola Field of southern Garvin County, Oklahoma, in mid-January 2011. Allegedly the earthquakes began to occur about seven hours after the first and deepest hydraulic fracturing stage at Picket Unit B well 4-18. 55 Id. 56 Dr. C. J. De Pater and Dr. S. Baisch, Geomechanical Study of Bowland Shale Seismicity: Synthesis Report, Nov. 2, 2011, available at http://www.cuadrillaresources.com/wp- content/uploads/2011/12/Final_Report_Bowland_Seismicity_02-11-11.pdf.

47

fracturing, inducing a seismic event “with similar magnitude is quite low.”57 Cuadrilla stated that the “seismic events [in Lancashire] were due to an unusual combination of geology at the well site coupled with the pressure exerted by water injection as part of operations.”58 This combination of geological factors was extremely rare and would be unlikely to occur together again at future well sites. In response, the company modified the amount of fluid used and installed a seismic early warning system.59

The UK Department of Energy and Climate Change (“DECC”) commissioned three independent experts to review Cuadrilla’s study and other information and to make appropriate recommendations for the mitigation of seismic risks in the conduct of future hydraulic fracturing operations. The report60 which was published on April 17, 2012, supported Cuadrilla’s determinations and concluded that fracking in Lancashire could continue as long as a new set of recommended safety measures were followed.61

Pre-dating the Arkansas, Oklahoma, and United Kingdom studies, the U.S. Geological Survey (“USGS”) prepared a 1990 report entitled “Earthquake Hazard Associated With Deep Well Injection – A Report to the U.S. Environmental Protection Agency.”62 This report evaluates the “probable physical mechanism for the triggering of and the criteria for predicting whether earthquakes will be triggered, based on the local state of stress in the Earth’s crust, the injection pressure, and the physical and the hydrologic properties of the rocks into which the fluid is being injected.” The report recommends care in selecting the locations of deep injection wells, namely “the desirability of high permeability and porosity in the injection zone and a site situated away from known fault structures,” which would make the possibility of “induced earthquakes…less likely.”63

57 Id. 58 Id. 59 Id. 60 Green, Styles, and Baptie, Preese Hall Shale Gas Fracturing – Review & Recommendations for Induced Seismic Mitigation, available at http://og.decc.gov.uk/assets/og/ep/onshore/5075-preese-hall-shale-gas-fracturing- review.pdf. 61 Id. Recommendations for continued hydraulic fracturing in Lancashire included the following: (1) pre-injection and monitoring before the main injection; (2) monitoring of fracturing growth and direction during the injection; (3) seismic monitoring; and (4) operations must be halted if events of magnitude of 0.5 or above are detected. Recommendations for all future fracturing activities include: (1) assessment of seismic hazards before injection begins; (2) establish baseline seismic monitoring; (3) locate any possible active faults in the region; and (4) apply suitable ground motion prediction models to assess the potential impact of any induced earthquakes. 62 Craig Nicholson and Robert L. Wesson, “Earthquake Hazard Associated With Deep Well Injection – A Report to the U.S. Environmental Protection Agency,” available at http://foodfreedom.files.wordpress.com/2011/11/earthquake-hazard-associated-with-deep-well-injection-report-to- epa-nicholson-wesson-1990.pdf. 63 Id.

48

The USGS has continued its research into earthquakes and hydraulic fracturing, and its scientists presented a report to the Seismological Society of America (“SSA”) in mid-April 2012.64 The study, led by USGS geophysicist William Ellsworth, found that, since 2001, the frequency of 3.0+ magnitude earthquakes has increased from 50 in 2009, to 87 in 2010, and to 134 in 2011.65 The scientists stated that “the acceleration in activity that began in 2009 appears to involve a combination of source regions of oil and gas production, including the Guy, Arkansas region, and in central and southern Oklahoma…A naturally-occurring rate change of this magnitude is unprecedented outside of volcanic settings or in the absence of a main shock, of which there were neither in this region. While the seismicity rate changes described here are almost certainly manmade, it remains to be determined how they are related to either changes in extraction methodologies or the rate of oil and gas production.”66

At the same SSA meeting, University of Memphis’ seismologist Steve Horton presented his paper entitled “Deep Fluid Injection Near the M5.6 Oklahoma Earthquake of November 2011,” in which he opined that the build-up of seismic activity in Oklahoma was triggered by fluid injection into the subsurface.67 He concluded that, “[b]ased on the previous injection history, proximity of the wells to the earthquakes and the previous seismic activity [in Oklahoma], the M5.6 earthquake was possibly triggered by fluid injection at these wells.”68

Dr. Horton has also studied the earthquake swarms in Arkansas, and observed that the geological fault line is a danger independent of any injection well.69 What Dr. Horton concludes is that a reasonable seismic risk strategy is needed to monitor earthquake activity and to reduce or stop the injection rate/pressure when seismic activity warrants.70

64 Mike Soraghan, ‘Remarkable’ Spate of Man-Made Quakes Linked to Drilling, USGS Team Says, ,EnergyWire March 29, 2012, available at http://eenews.net/public/energywire/2012/03/29/1. 65 Id.; see also Ellsworth, Are Seismicity Rate Changes in the Midcontinent Natural or Manmade , available at http://www.fossil.energy.gov/programs/gasregulation/authorizations/Orders_Issued_2012/65._Are_Seismicity_Rate _or_Manmade_.pdf. 66 Id. 67 Horton, S. (2012), Deep Fluid Injection Near the M5.6 Oklahoma Earthquake of November, 2011, available at http://www2.seismosoc.org/FMPro?-db=Abstract_Submission_12&-sortfield=PresDay&-sortorder=ascending&- sortfield=Special+Session+Name+Calc&-sortorder=ascending&-sortfield=PresTimeSort&-sortorder=ascending&- op=gt&PresStatus=0&-lop=and&-token.1=ShowSession&-token.2=ShowHeading&-recid=631&- format=%2Fmeetings%2F2012%2Fabstracts%2Fsessionabstractdetail.html&-lay=MtgList&-find. 68 Id. 69 Horton, S., Disposal of Hydrofracking-Waste Fluid by Injection into Subsurface Aquifers Triggers Earth Quake Swarm in Central Arkansas with Potential for Damaging Earthquake, Seismological Research Letters 83, 250-260 2012; see also S. Horton, Seismic Hazard and Class 2 UIC Disposal Wells, presentation made February 22, 2012, available at http://earthquake.usgs.gov/hazards/about/workshops/CEUS- WORKSHP/2.22.2012/Horton2012TriggeredEqs.pdf. 70 Id., see also Richard A. Kerr, Learning how to NOT Make Your Own Earthquakes, Science, March 23, 2012, available at http://ceriblog.files.wordpress.com/2012/03/learning-how-to-not-make-your-own-earthquakes.pdf.

49

From March through November 2011, there were nine microearthquakes near Youngstown, Ohio,71 within an eight-kilometer radius of a waste water injection well.72 Because earthquakes are rare in the Youngstown area, the Ohio Department of Natural Resources asked scientists with Columbia University’s Lamont-Doherty Earth Observatory (“LDEO”) to place mobile seismographs in the vicinity to better determine what was occurring. Four seismographs were installed on November 30, 2011.73 Two earthquakes measuring 2.7 and 4.0 on the Richter scale hit Youngstown on December 24, 2011, and December 31, 2011, respectively.74 Scientific American75 reported that, “[b]y triangulating the arrival time of shock waves at the four stations, [the LDEO] determined with 95% certainty that the epicenters of the two holiday quakes were within 100 meters of each other, and within 0.8 kilometer of the injection well. The team also determined that the quakes were caused by slippage along a fault at about the same depth as the injection site, almost three kilometers down.”76

The LDEO scientists did not go so far as to say that the pumping caused the quakes, but indicated that “fluids can act as lubricants between two abutting rock faces, helping them to suddenly slip along the boundary.”77 Nevertheless, on December 31, 2011, Ohio Governor John Kasich shut down five storage wells in the vicinity pending additional investigation.78 As requested by the Governor, the Ohio Department of Natural Resources (“ONDR”) researched and issued in March 2012, “A Preliminary Report on the Northstar 1 Class II Injection Well and the Seismic Events in the Youngstown, Ohio, Area.”79 This preliminary report recommends reforms to carefully monitor and stringently regulate Class II deep injection wells80 and recommends that an outside expert with experience in seismicity, induced seismicity and Class II injection wells conduct an independent review of all technical information available relating to earthquakes and injection wells.

71 Ohio Department of Natural Resources website, http://www.dnr.state.oh.us/tabid/8144/Default.aspx. 72 Henry Fountain, Ohio: Sites of Two Earthquakes Nearly Identical, N.Y. Times, Jan. 3, 2012, available at http://www.nytimes.com/2012/01/03/science/earth/ohio-sites-of-two-earthquakes-nearly- identical.html?_r=1&ref=us 73 Id. 74 Id. 75 Mark Fischette, Ohio Earthquake Likely Caused by Fracking Wastewater, Scientific American, Jan. 4, 2012. 76 Id. 77 Id.; see also “Ohio Quakes Probably Triggered by Waste Disposal Well, Say Seismologists,” available at http://www.ldeo.columbia.edu/news-events/seismologists-link-ohio-earthquakes-waste-disposal-wells 78 Maggie Schneider CNN, “Ohio Fracking Wells Closed in Wake of Quake,” Jan. 2, 2012, available at http://www.cnn.com/2012/01/01/us/ohio-earthquake; Joe Vardon, State links quakes to work on wells, The Columbus Dispatch, Jan. 1, 2012, available at http://www.dispatch.com/content/stories/local/2012/01/01/state-links- quakes-to-work-on-wells.html 79 Report is available at http://ohiodnr.com/downloads/northstar/UICreport.pdf. 80 Id. Some of the required reforms sought by the ODNR include: a review of existing geologic data for known faulted areas; a complete suite of geophysical logs to be run on newly drilled Class II disposal wells; operators must plug back with cement, prior to injection; a measurement of original downhole reservoir pressure prior to initial injection; installation of an automatic shut-off system set to operate if the fluid injection pressure exceeds a maximum pressure set by the ODNR; and installation of an electronic data recording system to track all fluids brought by a brine transporter for injection.

50

A similar situation has arisen in West Virginia, which experienced 10 quakes in 2010 and another one in January 2012.81 After the initial quakes in 2010, the West Virginia Department of Environmental Protection (“WVDEP”) worked with Chesapeake Energy Corporation to reduce the amount of fluid being injected into disposal wells in the area.82 The WVDEP claimed that Chesapeake Energy had begun to slowly increase the amount of injected fluid when the latest earthquake struck.83 While the WVDEP believes that there is a link between the earthquake and Chesapeake Energy’s alleged increased volume of fluid, there is no evidence to prove this conclusion because no seismic monitors were present at the site.84 Chesapeake Energy denies increasing the volume of underground injections and has stated that it is skeptical that any link exists, given that the earthquake occurred six miles from the disposal well, nearly three miles below the well’s disposal zone, and 25 earthquakes have been reported within 100 miles of the current seismic activity since 2000, one of which struck before the injection well was even drilled.85

Seismologist Arthur McGarr at the USGS has presented a model for calculating the highest magnitude earthquake that an operation injecting fluid deep underground, (i.e., hydraulic fracturing) could induce.86 Dr. McGarr and his team studied seven cases of quakes induced by fluid and uncovered a link between the volume of injected fluid and an earthquake’s magnitude.87 They found that every time the volume of fluids doubles, the magnitude increases by about 0.4.88 While the model cannot determine the likelihood of a quake occurring, it does assist engineers in knowing what to expect.89

On June 15, 2012, the National Research Council issued its report concerning the scale, scope and consequences of induced seismicity (earthquakes attributable to human activities) relating to energy technologies that involve fluid injection or withdrawal from the earth’s subsurface, including activities such as shale gas recovery, the use of hydraulic fracturing, and the disposal of waste water.90 The main findings of this study are: (1) the process of hydraulic fracturing as presently implemented does not pose a high risk for inducing seismic events; and (2) injection

81 The Associated Press, W.Va. DEP: Injection, quakes could be tied, Star Gazette, Jan. 13, 2012, available at http://www.stargazette.com/article/20120113/NEWS11/120113015/W-Va-DEP-Injection-quakes-could-tied. 82 Id. 83 Id. 84 Id. 85 The Associated Press, Chesapeake Skeptical of Quake-Drilling Connection, Saturday Gazette-Mail, Jan. 13, 2012, available at http://www.wvgazette.com/News/Business/201201130127. 86 Zoe Corbyn, Method Predicts Size of Fracking Earthquakes, Nature, Dec. 9, 2011, available at http://www.nature.com/news/method-predicts-size-of-fracking-earthquakes-1.9608; see also, McGarr, A. (1976), Seismic Moments and Volume Changes, J. Geophys. Res. 81(8), 1487-1494, doi: 10.1029/JB081i008p01487, abstract available at http://www.agu.org/pubs/crossref/1976/JB081i008p01487.shtml. 87 Id. 88 Id. 89 Id. 90 See ”Induced Seismicity Potential in Energy Technologies,” at http://www.nap.edu/catalog.php?record_id=13355).

51

for disposal of waste water into the subsurface does “pose some risk for induced seismicity, but very few events have been documented over the past several decades relative to the large number of disposal wells in operation…”91

Studies attempting to link earthquakes to underground injection are ongoing. The U.S. Environmental Protection Agency has not yet weighed in on this issue, but as the news media continues to focus on the issue and public concerns continue to rise, that may change. Unless more studies reveal a clear-cut relationship, the causal connection may not be resolved for many years. With the Arkansas and Texas cases in the early stages of litigation, a court’s decision regarding the connection is also several years away.

Litigation Concerning Local Bans of Hydraulic Fracturing

Northeast Natural Energy, LLC and Enrout Properties, LLC v. The City of Morgantown, West Virginia, Civil Action No. 11-C-411; In the Circuit Court of Monongalia County, West Virginia (June 23, 2011)

Northeast Natural Energy, LLC (“Northeast”) had signed several lease agreements with landowners in the Morgantown area, including one lease with Enrout Properties, LLC. (“Enrout”) (collectively, Northeast and Enrout, “Plaintiffs”). In March 2011, Northeast obtained drilling permits from the West Virginia Department of Environmental Protection (“WVDEP”). In May 2011, the Morgantown Utility Board questioned certain aspects of the permits as to the wells’ impact on the Monongahela River, specifically as to spill containment, spill prevention, well integrity, waste disposal, and fracking fluid containment. Northeast agreed to comply with the Board’s requests for additional safeguards. On June 7, 2011, the City of Morgantown began the process of enacting an Ordinance completely prohibiting “drilling a well for the purpose of extracting or storing oil or gas using horizontal drilling with fracturing or fracking methods within the limits of the City…or within one mile of the corporate limits of the City…”

Plaintiffs challenged the Ordinance, claiming that the City violated their constitutional rights by adopting a regulation in derogation of state laws promulgated by the WVDEP which regulates natural gas extraction. Plaintiffs contended that the WVDEP regulations preempted and precluded enforcement of the City’s Ordinance. The City argued that it had the authority to enact and enforce the Ordinance under the “Home Rule” provision in the West Virginia Constitution by characterizing the hydraulic fracturing process as a nuisance.

The Court found that the state legislature had given the WVDEP the “primary responsibility for protecting the environment; other governmental entities, public and private organizations and our citizens have the primary responsibility of supporting the state in its role as protector of the environment.” W.Va. Code § 22-1-1(a)(2) (1994). Additionally, the WVDEP was formed to

91 Id.

52

“consolidate environmental regulatory programs in a single state agency, while also providing a comprehensive program for the conservation, protection, exploration, development, enjoyment and use of the natural resources of the state of West Virginia.” W.Va. Code § 22-1-1(b)(2)-(3) (1994). The WVDEP controls the development of oil and gas in the state, including the issuance of permits. While acknowledging that the City has an interest in the control of its land, on August 12, 2011, the Court held that, in light of the state’s interest in oil and gas development and operations throughout the state and the all-inclusive authority given to the WVDEP, the City’s Ordinance was preempted by state legislation and was invalid. This decision of the Court was not appealed.92

Weiden Lake Property Owners Association, Inc. v. Jeff A. Klansky and Cabot Oil & Gas Corporation, 2011 N.Y. Misc. LEXIS 4081 (Sup. Ct.-Sullivan County, Aug. 18, 2011)

The Weiden Property Owners Association, Inc. (“Plaintiff”) was formed in 1999 to oversee and manage the subdivision and to maintain Weiden Lake and Dam. In May 2008, Plaintiff affirmed that the Protective Covenants it established prohibited commercial uses of the properties. The Covenants included provisions restricting the premises to single family homes and to agricultural and/or recreational use.

In June 2007, Jeff A Klansky (“Klansky”) purchased one of the lots in the subdivision. In July 2008, he entered into a lease that granted Cabot Oil & Gas Corporation (“Cabot”) the exclusive right to “explore for, drill for, produce and market oil, gas and other hydrocarbons” from Klansky’s lot for five years. Klansky received $99,255 as a signing bonus. The lease provided that Klansky made no representation as to the “permitted use(s) of the subject property and/or the legality of the use(s) contemplated” in the lease agreement.

Upon hearing of Klansky’s lease, Plaintiff filed this lawsuit and sought summary judgment that the activities under the lease were prohibited by the Protective Covenants. The Court agreed with Plaintiff and ruled that the Covenants unambiguously restricted the use of land in the community to single family residential, agricultural or recreational use. The Court also determined that Klansky did not have to return the signing bonus because of the “no representation” clause and because Cabot was a sophisticated business entity and knowingly decided to enter into the lease, approve title and pay the signing bonus with full knowledge of the Protective Covenants and Plaintiff’s position.

92 The City of Wellsburg, West Virginia which had enacted a similar ban in May 2011, rescinded its ordinance following the Court’s decision in the Northeast Natural Gas case.

53

Anschutz Exploration Corporation v. Town of Dryden and Town of Dryden Town Board, 35 Misc.3d 450, 940 N.Y.S.2d 458 (N.Y. Sup. Ct. 2012)

The Town of Dryden amended its Zoning Ordinance on August 2, 2011 to ban all activities related to the exploration for, and production or storage of, natural gas and petroleum within the town’s limits. Section 2104[5] of the Ordinance provided that “[n]o permit issued by any local, state or federal agency, commission or board for a use which would violate the prohibitions shall be deemed valid within the Town.”

Prior to the Amended Zoning Ordinance, Anschutz Exploration Corporation (“Anschutz”) had acquired gas leases covering approximately 22,000 acres in Dryden and had already invested approximately $5.1 million in activities within the town. On September 6, 2011, Anschutz filed its lawsuit (Case No. 2011-0902), requesting the court to nullify Dryden’s Ordinance under New York Environmental Conservation Law § 23-0303(2) (ECL).93

On February 21, 2012, after a careful and detailed analysis of the legislative history of ECL § 23- 0303(2), the court determined that generally the Town of Dryden’s Amended Zoning Ordinance was not preempted by the State laws, but ordered Section 2104[5] to be severed and stricken from the Ordinance. This decision was affirmed on May 2, 2013,94 with the appellate court stating that the ordinance “simply establishes permissible and prohibited uses of land within the Town for the purpose of regulating land generally.”

The New York State Court of Appeals (Case No. APL-2013-00245) granted Norse Energy Corporation USA (successor in interest to Anschutz) leave to appeal the lower courts’ decision.95 Since there was no right to appeal, in granting this leave to appeal, the court sends a strong signal that the legal issues will get a fresh look by New York's highest court.

Norse Energy filed its brief on October 28, 2013, asserting that the decision cannot stand because it “allows every municipality in the State of New York to ban any and all oil and gas development. The inevitable result is zero resource recovery, the ultimate in waste, and the obliteration of mineral owners’ correlative rights. This result starkly conflicts with the language and policies of the OGSML [Oil, Gas, and Solution Mining Law]…”

The Town of Dryden responded in a brief dated December 13, 2013, arguing that the “OGSML does not expressly preempt a locality’s right to enact a zoning ordinance that regulates land use generally and designates oil and gas mining as a prohibited use within municipal borders.” The

93 “The provisions of this article shall supersede all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries; but shall not supersede local government jurisdiction over local roads or the rights of local governments under the real property law.” New York State ECL § 23-0303(2). 94 The case was affirmed under the name In the Matter of Norse Energy Corporation USA v. Town of Dryden, et al., 964 N.Y.S. 2d 714 (Sup. Ct., 3d. Dep’t, App. Div. 2013), leave to appeal granted, Matter of Norse Energy Corp. USA v. Town of Dryden, 21 N.Y.3d 863 (N.Y. Aug. 29, 2013). 95 Id.

54

Town urges that the two separate, distinct regulatory schemes (the Town’s zoning ordinances and the policies of the OGSML) can “harmoniously coexist.”

A number of interested parties on both sides of the question have filed amicus briefs with the Court of Appeals.

• In their brief, fifty-two towns and villages in New York, the Association of Towns of the State of New York, the New York Conference of Mayors, and the New York Planning Federation argued that a local municipality has “the constitutionally guaranteed right…to create and preserve its own community character through generally applicable land use planning and zoning laws.” New York’s energy law “preempts only local regulation of the operations of the oil and gas industry, not local land use laws that govern whether and where such operations may take place within a municipality’s borders.”

• On behalf of the 1.6 million residents of Manhattan, the Manhattan Borough President asserted that “municipalities are far better situated than the State to discern what land use is appropriate for their territory.” While home rule provides municipalities with wide latitude to use zoning to address environmental and public health issues, the State Legislature can “expressly [preempt] municipal zoning power where its sees fit…and local zoning ordinances will not necessarily disrupt the development of industry statewide.”

• According to the Independent Oil and Gas Association of New York, Inc., the OGSML “unequivocally states that all local ordinance relating to oil and natural gas development are preempted.”

• A group of 26 businesses argued that “a municipality’s home rule authority to protect sustainable enterprises through the exercise of State-delegated zoning powers over potentially detrimental land uses” must be preserved.

• The American Petroleum Institute and the Chamber of Commerce of the United States of America stated that their members have made “substantial financial investments in New York in order to develop the State’s natural gas resources.” These groups assert that the town’s ordinance is invalid because it conflicts with the structure and purpose of the OGSML which vests exclusive authority over drilling operations to the state’s Department of Environmental Conservation and because it puts “at risk the efficacy of drilling across the State…”

• Several groups of landowners, farmers, labor unions, municipalities, and businesses joined to file an amicus brief urging that “decisions regarding the production of New York’s natural resources must be made by the experts at the State level and not by New York’s municipalities, each possessing varying degrees of expertise, and each making

55

decisions in an individual vacuum without consideration for the important State interests and policies at issue.”

• Siding with the Town of Dryden, a group of land-use legal experts opined that a “presumption against preemption of local zoning laws is especially strong where the allegedly preemptive state law makes no provision for protecting the quiet enjoyment of land. It is simply implausible to infer that the state legislature intentionally conferred on the gas and oil extraction industry a statutory right to site a towering drill and accompanying truck traffic, waste pits, compressor stations, and the like next door to a quaint bed-and-breakfast in a rural hamlet or single-family home in a quiet residential suburb.”

Oral arguments are scheduled for June 3, 2014.

Cooperstown Holstein Corporation v. Town of Middlefield, 35 Misc.3d 767, 943 N.Y.S.2d 722 (N.Y. Sup. Ct. 2012)

The Town of Middlefield, Otsego County, New York, enacted a zoning law on June 14, 2011, which effectively banned oil and gas drilling within the geographical borders of the township by stating that “heavy industry and all oil, gas or solution mining and drilling are prohibited uses…” of property within the Town. Cooperstown Holstein Corporation (“Plaintiff”) had signed two leases with Elexco Land Services, Inc. in 2007 with respect to property Plaintiff owned in Middlefield. Plaintiff asserted that the purposes of those leases would be frustrated by the new zoning law.

As in the Town of Dryden case, Plaintiff brought a lawsuit to have Middlefield’s zoning law overturned, claiming that New York Environmental Conservation Law § 23-0303(2) (ECL) preempted any regulations emanating from local authorities with respect to the regulation of gas, oil, and solution drilling or mining. On February 24, 2012, after examining the legislative history of ECL § 23-0303(2), the Court ruled that this clause did not “preempt a local municipality…from enacting land use regulation within the confines of its geographical jurisdiction and, as such, local municipalities are permitted to permit or prohibit oil, gas and solution mining or drilling in conformity with such constitutional and statutory authority.” This ruling was confirmed by the New York appellate court on May 2, 2013.96 As in the Town of Dryden lawsuit, infra., New York’s highest court has agreed to review this decision.

The subsequent history of this lawsuit tracks the events in the Town of Dryden lawsuit, infra., with briefs being filed and oral argument scheduled for June 3, 2014, in Case No. APL-2013- 00242.

96 Cooperstown Holstein Corporation v. Town of Middlefield, 964 N.Y.S.2d 431 (2013) leave to appeal granted, 21 N.Y.3d 863 (N.Y. Aug. 29, 2013).

56

Jeffrey, et al v. Matthew T. Ryan, in his official capacity as Mayor, City of Binghamton, and the City Council, City of Binghamton, No CA2012-001254, 37 Misc.3d 1204(A), 2012 WL 4513348). (N.Y. Supreme Court, Broome Co. Oct. 2, 2012)

On December 22, 2011, the Mayor of the City of Binghamton, New York signed Local Law No. 6, prohibiting all natural gas exploration and extraction activities and all natural gas support activities within the city limits and at all sites within 500 feet of any city boundary. The Plaintiffs (an individual landowner, an owner of an 11-acre industrial site, two unincorporated associations of landowners, and the owner of a Holiday Inn) filed a lawsuit in late May 2012, alleging that the Mayor signed this law without the required approval of the Broome County Department of Planning and Economic Development and that New York law prohibits the City from banning or regulating any oil and gas exploration and extraction activities.

The Plaintiffs claim that this ban adversely affects their opportunities to lease their land for natural gas exploration and extraction as well as their business opportunities.97 They seek a court order that Local Law No. 6 be declared jurisdictionally defective and therefore null and void because the City did not obtain the mandatory approval of the Broome County Department of Planning and Economic Development; because New York’s Oil, Gas and Solution Mining Law, ECL § 23-303[2] prohibits local governments from directly regulating the mining industry or its activities; and because neither New York’s Municipal Home Rule Charter nor the City’s general police power authorizes the City to adopt a moratorium banning otherwise permissible land-use and development activities.

Defendants filed a motion to dismiss and a motion for summary judgment on July 27, 2012. On October 2, 2012, the Supreme Court determined that the “City cannot just invoke its police power solely as a means to satisfy certain segments of the community.” The local law failed to meet the criteria for a properly enacted moratorium because there was “no showing of dire need since the New York State Department of Environmental Conservation has not yet published the new regulations that are required before any natural gas exploration or drilling can occur in this state.” Without actual drilling, there is no emergency and, therefore, no need for a moratorium. The Court invalidated the local ban.

Penneco Oil Co., Inc., et al. v. County of Fayette, Pennsylvania, et al., 4 A.3d 722 (Pa. Commw. Ct. June 22, 2010), appeal denied, 2012 Pa. LEXIS 40, 41 (Pa. Jan. 6, 2012)

In May of 2008, Penneco Oil Company, Inc., Range Resources-Appalachia, LLC, and the Independent Oil & Gas Association of Pennsylvania filed a lawsuit against Fayette County and the county agency responsible for zoning administration claiming that the Fayette County zoning code provisions applicable to oil and gas development were preempted by the Pennsylvania Oil

97 For example, the owners of the Holiday Inn and the industrial site had anticipated renting rooms and/or storage space to the oil field companies and their workers.

57

and Gas Act (the “Act”). A county zoning ordinance allowed oil and gas development as a permitted use in some areas but required special exception approval in other areas within Fayette County. The ordinance provided that wells may not be located within the flight path of an airport runway, wells may not be located closer than 200 feet of a residence or 50 feet of a property line or right-of-way; fencing and shrubbery must surround the pump head and support equipment; and the zoning hearing board may attach additional conditions to protect the public’s health, safety and welfare. The gas operator plaintiffs argued that the county’s ordinance was preempted by the Act because (a) surface or deep mining did not require a special exception in the same areas, (b) it gives the zoning hearing board discretion to impose conditions for oil and gas wells, (c) it requires a costly well permit, (d) there is no guarantee of a special exception even if all the special exception requirements are met, and (e) the purposes of the zoning ordinance are the same as the Act.

The trial court found that the zoning ordinance was not preempted by the Act. That decision was upheld on appeal to the Commonwealth Court of Pennsylvania which determined that the ordinance did not pertain to the technical aspects of well operations, but rather to preservation of the character of residential neighborhoods. The appeals court also determined that the zoning board did not impose unreasonable conditions on the grant of a special exception and could attach additional conditions to protect the public’s health, welfare and safety and that these provisions did not reflect an attempt by Fayette County to enact a comprehensive regulatory scheme relative to oil and gas development in the county.

Lenape Resources, Inc. v. Town of Avon, Town of Avon Board, and New York State Department of Environmental Conservation, Index No. 1060-2012, In the Superior Court of the State of New York, County of Livingston (November 13, 2012)

In the summer of 2012, the town of Avon passed Local Law T-A-5-2012 entitled “Moratorium on and Prohibition of Gas and Petroleum Exploration and Extraction Activities Underground Storage of Natural Gas and Disposal of Natural Gas or Petroleum Extraction Exploration and Production Wastes.” The one-year moratorium on natural gas extraction and underground storage began in June 2012 and includes a “grandfather clause” for existing wells. Lenape Resources, Inc. (“Lenape”) who operates 16 to 20 wells in the Avon area on about 5,000 acres sought to overturn the moratorium, asserting that the local law was preempted by state law, invalid, unreasonable, arbitrary, oppressive, and unconstitutional. Lenape requested an injunction to stop enforcement of the law and sought actual and compensatory damages of no less than $50 million.

On March 15, 2013, Judge Robert B. Wiggins of the State of New York, Supreme Court, County of Livingston, entered an order dismissing Lenape’s 10-count lawsuit. The Court determined that New York state court precedents have established that local bans based on zoning laws do

58

not amount to attempts to regulate the oil and gas industry and therefore are not preempted by the state’s Oil, Gas and Solution Mining Law. Lenape has appealed this decision.98

Currently briefs are being filed, with reply briefs due by April 11, 2014.99

Sarner v. City of Loveland, Colorado, Case No. 2013CV03171, In the District Court of Larimer County, Colorado (September 3, 2013)

Protect Our Loveland, Inc. v. City of Loveland, Colorado and City Council of Loveland, Colorado, Case No. 2013CV31142, In the District Court, Larimer County, Colorado (September 30, 2013)

The group Protect Our Loveland, Inc., seeking to give the citizens of Loveland, Colorado a chance to vote on a proposed ordinance as to whether hydraulic fracturing should be banned within the city for two years while health and environmental impacts studies are being conducted, circulated a petition, collected the required signatures from Loveland voters, and submitted the petition to the City Clerk. The Clerk later notified the group that the petition contained the requisite number of valid signatures and was sufficient to be submitted to the Loveland City Council for further action.

Larry Sarner protested the City Clerk’s certification of the ballot initiative, arguing that the group had not gathered sufficient signatures and that their proposed ordinance did not meet other requirements for ballot placement. A hearing was held on August 22, 2013, at which the City Clerk rejected Sarner’s arguments. Sarner sought review of this decision by filing a complaint in the state district court of Larimer County on September 3, 2013. A few hours later the City Council voted to take no action with regard to the proposed ordinance. Shortly thereafter, Protect Our Loveland filed its complaint.

On February 11, 2014, the District Court upheld the Loveland City Clerk’s ruling that Protect Our Loveland had met the requirements of election law to place the initiative on a ballot.

City of Denton v. Eagleridge Energy LLC, et al., Case No. 2013-30817-211, In the 211th Judicial District Court of Denton County, Texas, October 18, 2013)

The city of Denton, Texas filed suit against Eagleridge Energy LLC to prevent the company from continuing to drill two new gas wells in an area between two residential developments without the required city permit approvals. The city argued that Eagleridge was violating an ordinance that required the approval of a site plan before drilling could commence and a second ordinance that required a setback of at least 1,200 fee from any residence.

98 Docket No. 14-00102, In the Appellate Division of the Supreme Court of New York, Fourth Department. 99 Lenape Resources, Inc. v. Town of Avon, et al, 2014 N.Y. Slip Op. 64929(U) (February 24, 2014).

59

Vermillion, et al v. Mora County, New Mexico, Mora County Board of County Commissioners, et al., No. 1:13-cv-01095 (D.N.M., November 11, 2013)

SWEPI L.P. v. Mora County, New Mexico, Mora County Board of County Commissioners, et al., Case No. 1:14-CV-00035 (D.N.M. January 10, 2014)

On April 29, 2013, the members of the Mora County Board of County Commissioners voted 2-1 to enact an ordinance, entitled “Mora County Community Water Rights and Local Self- Government Ordinance.” The Ordinance is described as being “a local bill of rights for Mora County that protects the natural sources of water from damage related to the extraction of oil, natural gas or other hydrocarbons…” According to the Vermillion plaintiffs (landowners and the Independent Petroleum Association of New Mexico), the real purpose of this ordinance is to prevent the lawful development of oil and natural gas resources located in Mora County and to ban hydraulic fracturing within the County.

The Vermillion plaintiffs argue that the Ordinance deprives them of their “fundamental property rights” to lease their minerals, in violation of substantive due process and the first and fourteenth amendments. In addition, they assert that the Ordinance is preempted by the New Mexico Oil and Gas Act, which confers authority over oil and natural gas extraction within the state to the Oil Conservation Commission and the Oil Conservation Division.

On March 20, 2014, the court issued a scheduling order, requiring discovery to be completed by November 13, 2014 and a proposed pre-trial order due on or before February 11, 2015.

In a related lawsuit, SWEPI, L.P. argues that is unable to exercise its constitutional property rights under an oil and gas lease dated August 1, 2010. According to SWEPI, the ordinance prohibits the company from various activities, including drilling wells, transporting and storing materials and equipment, and constructing the necessary infrastructure relating to the exploration for and extraction of gas, oil and other hydrocarbons. SWEPI seeks an injunction preventing Mora County from enforcing the ordinance and “damages as compensation for a regulatory taking of its property.”

Trinity East Energy LLC v. Dallas, Case No. DC-14-01443, In the 192nd Judicial District Court of Dallas, Texas (February 13, 2014)

On February 13, 2014, Trinity East Energy LLC sued the city of Dallas for alleged breach of an oil and gas lease when the City Council voted to deny the company’s drilling permits on public land. Seeking more than $200 million in damages, Trinity East argues that the city’s planning commission denied the permits without any evidence that the drilling would cause harm to the environment or to the residents. A spokesperson for Dallas stated that Trinity had asked for permits to drill on city park land, in the floodplain and near a new soccer complex and that the

60

city validly exercised its regulatory powers to protect public health and safety as well as the environment by denying the permits.

Litigation Concerning State vs. Local Zoning Regulation of Hydraulic Fracturing

State of Ohio ex rel. Jack Morrison, Jr., Law Director City of Munroe Falls, Ohio, et al. v. Beck Energy Corporation, et al., Case No. CV2011-04-1897; appealed to the 9th Appellate District, Summit County, Ohio, Case No. 25953, 2013-Ohio-356 (Feb. 8, 2013); currently in the Supreme Court of Ohio, Case No. 2013-0465 (filed Mar. 22, 2013)

Beck Energy Corporation secured a permit from Ohio’s Department of Natural Resources to drill on property located in the City of Munroe Falls. When Beck Energy began to drill, the city issued a Stop Work Order and filed a complaint in the Summit County Court of Common Pleas seeking an injunction to stop the drilling based on Beck Energy’s alleged failure to comply with local ordinances requiring permits for drilling, zoning, and rights-of-way. The trial court granted the injunction, and Beck Energy appealed to the 9th Court of Appeals.

The appellate court reversed and remanded the lawsuit, finding that the city’s ordinances concerning drilling were in direct conflict with and were preempted by R.C. 1509.02 which provides that the Division of Mineral Resources Management of the Ohio Department of Natural Resources has “sole and exclusive authority to regulate the permitting, location, and spacing of oil and gas wells.” The city, however, “may enforce ordinances governing rights-of-way and excavations” as long as they are enforced fairly, in a way that does not discriminate against, unfairly impede, or obstruct oil and gas activities and operations.

This decision has been appealed to the Ohio Supreme Court. Several other Ohio municipalities, as well as environmental groups including the Natural Resources Council, have filed briefs in support of Munroe Falls, while industry groups such as the American Petroleum Institute have sided with the state. Oral arguments were held on February 26, 2014.

Robinson Township, et al v. Commonwealth of Pennsylvania, et al, No. 284 M.D. 2012 (Commonwealth Court of Pennsylvania, March 29, 2012), which is being appealed, 63 MAP 2012, 64 MAP 2012, 72 MAP 2012 and 73 MAP 2012 (Supreme Court, Middle District, August 17, 2012)

Seven municipalities in three counties,100 the Delaware Riverkeeper Network, and Dr. Mehernosh Kahn101 (“Plaintiffs”) filed a lawsuit against the Commonwealth of Pennsylvania and

100 Robinson Township, Peters Township, Cecil Township, and Mount Pleasant Township in Washington County; Yardley Borough and Nockamixon Township in Bucks County; and South Fayette Township in Allegheny County. 101 Dr. Kahn questions a section of Act 13 (the legislation that is under scrutiny in this lawsuit) which provides that, except in an emergency, a physician who needs proprietary information about chemicals used in natural gas drilling to assess a patient must provide “a written statement” to a company and must sign a confidentiality agreement. 58 Pa. C.S. §3222.1(b)(11).

61

three state agencies102 (“Defendants”) seeking an injunction to prevent the state from putting into effect the Act of February 14, 2012, P.L. ___, 58 Pa. C.S. §§2301-3504 (“Act 13”).103 Plaintiffs challenge whether the state is authorized to supersede local regulation of gas drilling by restricting the municipalities’ ability to zone natural gas drilling and barring them from keeping natural gas wells out of residential zones.

Act 13 is a substantial re-write of the Commonwealth’s Oil and Gas Act and applies to unconventional natural gas operations involving either hydraulic fracturing or the use of multilateral well bores or techniques that expose more of the geological formation to the well bore. Act 13 imposes statewide standards that dictate where wells, compressor stations104 and other drilling-related structures can be built. It requires all local drilling regulations to be reasonable and that any questions of reasonableness would be determined by the Public Utility Commission. 58 Pa. C.S. §§ 3302-3309.

Section 3309 provides that Act 13 applies to all ordinances existing on April 14, 2012 (the effective date of the Act) and that municipalities had 120 days from the effective date to “review and amend an ordinance in order to comply with” the Act. 58 Pa. C.S. §3309 (a) - (b). In their motion for preliminary injunction, the municipalities argued that due to the requirements of the Municipalities Planning Code 53 P.S. § 10101 et seq., 120 days was insufficient time to amend their ordinances and that “the oil and gas industry has taken the position that it has free reign for the installation of any and all of its infrastructure as of April 14, 2012.”105 The Court agreed with Plaintiffs and issued a limited preliminary injunction on April 11, 2012, stating:

While the ultimate determination on the constitutionality of Act 13 is not presently before the Court, the Court is of the view that municipalities must have an adequate opportunity to pass zoning laws that comply with Act 13 without the fear or risk that development of oil and gas operations under Act 13 will be inconsistent with later validly passed local zoning ordinances. For that reason, pre-existing ordinances must remain in effect until or unless challenged pursuant to Act 13 and are found to be invalid… [T]he Court agrees with petitioners that 120 days is not sufficient time to allow for amendments of local ordinances and, therefore, will preliminarily enjoin the effect date of Section 3309 for a period of 120 days.

102 Pennsylvania Public Utility Commission, Office of the Attorney General of Pennsylvania, and Pennsylvania Department of Environmental Protection. 103 For a complete summary of Act 13, see Janet L. McQuaid, Megan E. Smith Miller, Kristen Roche, Stefanie A. Lepore, and Michael P. Gaetani, “Pennsylvania Act 13 (BH1950) Rewrites Law Governing Oil and Gas Activities,” Fulbright & Jaworski L.L.P. Briefing, March 2012. 104 But see MarkWest Liberty Midstream & Resources LLC v. Cecil Township, Case No. 430 MD 2012, In the Commonwealth Court of Pennsylvania (June 29, 2012) (court affirmed Township’s denial of MarkWest’s application to build a gas compression station even though plan met requirements of Act 13). 105 Motion for Preliminary Injunction ¶19.

62

On May 3, 2012, the Commonwealth agencies filed a notice of appeal with the Supreme Court of Pennsylvania, Middle District (Case No. 40 MAP 2012), questioning the issuance of the injunction. On the remaining issues, the Court of Common Pleas issued an order on July 26, 2012, in response to the Commonwealth’s preliminary objections and cross-motions for relief. The Court found that section 3304 violated substantive due process because it forced municipalities to enact zoning ordinances that permit oil and gas operations in all zoning districts, including residential areas. This order of the Commonwealth Court is also being appealed (Case Nos. 63 MAP 2012, 64 MAP 2012, 72 MAP 2012 and 73 MAP 2012). These four appeals were argued on October 17, 2012, with Case No. 40 MAP 2012 stayed pending the decision in these appeals.

A word on Case No. 63 MAP 2013: After the July 26, 2013 decision, the Pennsylvania Public Utility Commission (“PUC”) started reviewing local zoning ordinances under a section of the law not specifically mentioned in the Commonwealth Court’s ruling. In a short order dated October 26, 2012, the Commonwealth Court stated that the PUC did not have the authority to review local oil and gas drilling ordinances under the terms of the injunction while the high court was deliberating on the portion of the law that would prevent municipalities from banning natural gas drilling.

The PUC appealed this decision to the state Supreme Court (Case No. 63 MAP 2012). On July 25, 2013, in a one-page decision, the state Supreme Court with six justices (one justice suspended and now a convicted felon on public corruption charges) rejected the appeal, Upholding the Commonwealth Court’s October 26th ruling. With seven justices now sitting on the Supreme Court, on August 6, 2013, the PUC and the Pennsylvania Department of Environmental Protection (“PDEP”) filed an Application to Resubmit Case and an Application for Reconsideration Before Entire Court. The agencies argue that the matter should be considered by the full court “because of the importance of the issues pending in this appeal, and in light of the fierce divide among the commissioned judges of the Commonwealth Court as to the constitutionality of the [provision].”

Without ruling on the motion for seven justices to re-hear the appeals arguments, on December 19, 2013, in a 4-2 decision, the Supreme Court of Pennsylvania, Middle District issued its opinion and mandate affirming the lower court’s decision. In a 162-page opinion, three justices held that the law preventing local governments from passing zoning ordinances prohibiting natural gas drilling was unconstitutional, violating the Environmental Rights Amendment of the state’s constitution. A fourth justice, concurring with the majority, found that the law violated due process rights by “unconstitutionally, as a matter of substantive due process, usurp[ing] local municipalities’ duty to impose and enforce community planning…”

The Court also remanded the case back to the lower Commonwealth Court (284 M.D. 2012) to determine whether the valid provisions of Act 13 are severable from those provisions found to be unconstitutional and whether a section of the law that exempts drillers from having to inform

63

owners of private water sources in the event of a potentially contaminating spill near their properties is unconstitutional.

On January 2, 2014, Defendants filed an application for re-argument, asking the Court to reconsider its decision. This application was denied on February 21, 2014.

On April 1, 2014, opening briefs were filed in the Commonwealth Court on the remanded issues.

Both the Pennsylvania Department of Environmental Protection and the Pennsylvania Public Utility Commission (PUC) urge severability. In its brief, the PUC states that “when it is reasonably possible to sustain the bulk of a legislative enactment, the courts of the Commonwealth should do so. Here, there are no special circumstances that require – or even suggest the need for – this Court to deploy its red pen any further. It is plain that [certain sections] of Act 13 may operate independently of those provisions that have already been stricken.”

The PUC asserts that, in spite of the December 2013 ruling, it retained the authority to review local ordinances regulating oil and gas drilling operations. Specifically, the PUC contends that sections 3305-3309 can be implemented without the sections that were declared invalid. Section 3305 allows the PUC to review local zoning ordinances for compliance with the Municipalities Planning Code (MPC); sections 3306-3307 provide that an aggrieved person can file a lawsuit to invalidate an ordinance that violates the MPC; section 3308 provides that, for noncompliance with the MPC, impact fees may be withheld from the municipality; and section 3309 gives a municipality 120-days to review and amend an ordinance for compliance.

In their brief, the petitioners argue that section 3218.1 of Act 13 which provides that the public water well owners are to receive notice of a spill resulting from drilling operations is unconstitutional because it violates equal protection by excluding notice to owners of private water sources.

The Commonwealth Court has scheduled an en banc argument for May 14, 2014, at 9:30 a.m. (EDT).

Colorado Oil and Gas Conservation Commission v. City of Longmont, Colorado, Case No. 2012-0730, In the District Court, Boulder County, Colorado (July 30, 2012)

Colorado Oil & Gas Association v. City of Longmont, Colorado, Case No. ______, In the District Court, Weld County, Colorado (December 17, 2012), transfer of venue to Boulder County, Colorado on March 8, 2013

The City Council of Longmont, Colorado passed several ordinances relating to banning and/or restricting hydraulic fracturing activities in the area around the city. The ordinances include provisions that the city would decide whether directional and horizontal drilling were “possible

64

and appropriate,” what set-backs would be used, how to protect wildlife and their habitat, and where drilling could take place as well as requiring chemical reporting, visual mitigation methods, and water quality testing and monitoring. In November 2012, a citizen-initiated hydraulic fracking restriction was passed by the voters, and the City amended its charter to prohibit hydraulic fracturing and the disposal of fracking wastes anywhere within the city limits.

The Colorado Oil and Gas Conservation Commission (COGCC) sued the city, arguing that only the COGCC had the authority to establish regulations concerning hydraulic fracturing and the city’s ordinances were preempted by the COGCC’s authority. The Colorado Oil & Gas Association (COGA) presented the same argument, stating that the city ordinances constitute an “illegal ban on oil and gas drilling, they deny private mineral owners the right to develop their property, they attempt to prohibit operations that the state laws permit, and they purport to regulate technical aspects of oil and gas operations in a manner that is preempted by the Colorado Oil and Gas Conservation Act and its implementing regulations.”

In early July 2013, the COGA asked the Court to join the COGCC as a co-plaintiff in its lawsuit, stating that the Commission has “a broader interest in its ability to protect its plenary and regulatory authority to regulate the technical aspects of oil and gas drilling, generally, in Colorado.” The COGCC agreed to the joinder. The Court has allowed other parties to join, including TOP Operating, the Sierra Club, Food & Water Watch, Earthworks, and Our Health, Our Future, Our Longmont, but with a warning not to go beyond the issues set out in COGA’s complaint.

On March 14, 2014, the city of Longmont issued a press release106 stating that the “City has agreed with the State to conserve resources by focusing on [the Colorado Oil & Gas Association] case [which concerns the hydraulic fracturing initiative] before resolving [the Colorado Oil and Gas Conservation Commission] case about Longmont’s oil and gas regulations.” According to the city, its strongest position is with the COGA case, “including the fact that the only company actively producing oil and gas in Longmont has agreed to the regulations.” “The State and COGA have told the court that, if the City wins the fracking case, the regulations case will become moot.”

Colorado Oil and Gas Association v. City of Fort Collins, Colorado, Case No. 2013CV031385, In the District Court, Larimer County, Colorado (December 3, 2013)

Colorado Oil and Gas Association v. City of Lafayette, Colorado, Case No. 2013CV031746, In the District Court, Boulder County, Colorado (December 3, 2013)

In November 2013, the citizens of Fort Collins, Colorado and Lafayette, Colorado voted to ban hydraulic fracturing from their cities. In Fort Collins, a five-year ban on hydraulic fracturing

106 See “Court Turns Attention to Hydraulic Fracking Lawsuit” found at http://www.ci.longmont.co.us/news/pr/2014/fracklawsuit.htm.

65

was approved with 55% of the vote. Sixty percent (60%) of the voters in Lafayette approved an indefinite ban on all oil and gas development, including the deposit, storage, or transportation of fracking wastewater through “the land, air or waters” of the city. In both cities, the City Councils had opposed the bans.

On December 3, 2013, the Colorado Oil & Gas Association (COGA) filed a lawsuit against each city, challenging the validity of the bans. COGA argues that a conflict exists between the bans and state law since the cities have no constitutional or statutory authority to implement regulations on oil and gas development techniques, such as hydraulic fracturing. COGA points to Colorado Supreme Court precedent and state law to support its stance that hydraulic fracturing cannot be blocked by municipalities.

According to COGA, the state’s General Assembly has declared it to be in the public’s interest for the state to “foster the responsible and balanced development, production, and utilization of the natural resources of oil and gas in Colorado in a manner consistent with protection of public health, safety, and welfare, including protection of the environment and wildlife resources.” The Oil and Gas Conservation Act created the Colorado Oil and Gas Conservation Commission (COGCC) to administer all “rules, regulations and orders with respect to operations for the production of oil and gas,” including “permitting, drilling production, plugging, spacing and chemical treatment of wells.”

In the Fort Collins lawsuit, three environmental groups filed a motion to intervene on February 13, 2014. These groups represented by the University of Denver Environmental Law Clinic want to intervene to uphold the fracking ban, stating that the city cannot adequately represent their interests because the city council opposed the ban during the election and is now concerned about the cost of defending the lawsuit. They see the lawsuit as a “blatant attempt…to bypass the will of the voters and possibly jeopardize public health, safety and property values in our community.”

Litigation Claiming Moratorium on Hydraulic Fracturing Affected Investment

Wallach, et al. v. The New York State Department of Environmental Conservation, et al., Index No. 6770-13, In the Supreme Court of the State of New York, County of Albany (December 17, 2013)

On December 17, 2013, the trustee for a bankrupt energy company and a shareholder in that company sued New York State’s Department of Environmental Conservation (“DEC”) and other state officials, including the governor, asserting that the shareholder had lost almost his entire investment of $21,305.52 due to the decrease in the value of the company’s stock and that the company has lost more than $100 million due to the hydraulic fracturing moratorium that has been in place since 2008.

66

The energy company has 27 well-permit applications pending before the DEC. As part of the bankruptcy proceedings, the trustee tried to sell these assets at auction, but received no bids. According to the complaint, “the only way to salvage the value of [the company’s] assets is to complete the SGEIS [Supplemental Generic Environmental Impact Statement] Process.” The Plaintiffs seek a mandamus to compel completion of the SGEIS Process and a determination that government officials have “arbitrarily and capriciously, abused their discretion.”

In 2008, the New York legislature passed regulations covering hydraulic fracturing. Then- governor David Patterson ordered the DEC to conduct an environmental evaluation of fracking and ordered the well approval process halted until the study was completed which was anticipated to be November 2009. A draft report was published in September 2009, but the DEC spent more than one year reviewing public comments. In December 2010, Patterson issued an executive order requiring further environmental review. Gov. Andrew Cuomo kept the order in place when he took office. In September 2012, the DEC and the Department of Health began a study of the health impacts associated with hydraulic fracturing.

At a news conference on December 16, 2013, Gov. Cuomo and Dr. Nirav R. Shah, the New York State Health Commissioner, stated that there was no time-line to complete the study. Mr. Cuomo said, “My timeline is whatever commissioner Shah needs to do it right and feel comfortable.” The governor said he did not want “to put undue pressure on them that would artificially abbreviate what they’re doing.” Dr. Shah indicated that he was still conducting his review, collecting “new data from Texas and Wyoming.” When asked about transparency of the study, he stated that “the process needs to be transparent at the end, not during.”107

On February 21, 2014, the New York Attorney General filed a motion to dismiss, arguing that the plaintiffs had no legal right to mandamus relief, failed to state a claim, and that their claims were barred by the statute of limitations.

Litigation Over Delays in Completing State Study of Hydraulic Fracturing

Joint Landowners Coalition of New York, et al. v. Andrew M. Cuomo, et al., Case No. ______, In the Supreme Court of the State of New York, County of Albany

In mid-2008, the New York legislature passed regulations covering high volume hydraulic fracturing. Then-governor David Patterson ordered the DEC to conduct an environmental evaluation of fracking and horizontal wells and ordered the well approval process halted until the study was completed which was anticipated to be November 2009. A draft report was published in September 2009, but the DEC spent more than one year reviewing public comments. In December 2010, Patterson issued an executive order requiring further environmental review. Gov. Andrew Cuomo kept the order in place when he took office. In September 2012, the DEC

107 See Jesse McKinley, Still Undecided on Fracking, Cuomo Won’t Press for Health Study’s Release, N.Y. Times, December 16, 2013.

67

and the Department of Health began a study of the health impacts associated with hydraulic fracturing. At a news conference on December 16, 2013, Gov. Cuomo and Dr. Nirav R. Shah, the New York State Health Commissioner, stated that there was no time-line to complete the study. Gov. Cuomo said, “My timeline is whatever commissioner Shah needs to do it right and feel comfortable.” The governor said he did not want “to put undue pressure on them that would artificially abbreviate what they’re doing.”

With no deadline in sight, on February 14, 2014, a group of more than 70,000 landowners and several other individual landowners filed a lawsuit against Gov. Cuomo, the DEC, the New York Department of Health (DOH), and Dr. Shah, complaining that the failure to finalize the supplemental generic environmental impact statement (SGEIS) has prevented them “from developing their mineral estates…or otherwise leasing or conveying their mineral estate, all of which has been detrimental and contrary to environmental and energy policies in the State of New York and the guarantees found in the Fifth and Fourteenth Amended to the United States Constitution.” The petitioners seek an order compelling completion of the SGEIS within a court- ordered deadline. They argue that Gov. Cuomo has exceeded his authority by orchestrating the delay in the SGEIS process and that the referral to the DOH was arbitrary, capricious, and an “improper delegation of the DEC’s substantive and procedural Lead Agency responsibilities” as required by the State Environmental Quality Review Act.

Litigation Concerning Restrictions for Drilling and Seismic Testing

Pennsylvania Oil and Gas Association, et al. v. U.S. Forest Service, et al., Case No. 1:08-cv- 0162, In the U.S. District Court for the Western District of Pennsylvania

On February 21, 2014, an opinion and order from U.S. District Judge Mark R. Hornak dismissed for want of subject matter jurisdiction a nearly six-year old lawsuit brought by oil and gas industry groups challenging 2007 rules restricting drilling in the Allegheny National Forest. Filing a lawsuit against the U.S. Forest Service (USFS) in 2008, the groups sought to prevent implementation of those restrictions. Because the USFS “has now abandoned any intent to” putting these [2007] rules into effect, the Court concluded that “no justiciable case or controversy remains” and dismissed the lawsuit without prejudice. See Pennsylvania Independent Oil and Gas Association, et al. v. U.S. Forest Service, et al., No. 08-162, W.D. Pa.; 2014 U.S. Dist. LEXIS 21601.

Prior to 2008, access to private oil and gas holdings within the Allegheny National Forest occurred through a “cooperative process” under which drillers were required to give the USFS detailed notice concerning proposed drilling activities at least 60 days before commencing drilling operations. The drillers and USFS would then enter into negotiations to address and mitigate any potentially unnecessary or harmful surface use. When agreement was reached, the USFS would issue a “Notice to Proceed” (NTP).

68

In late 2008, several environmental groups questioned the issuance of NTPs without first conducting an appropriate National Environmental Policy Act (NEPA) analysis. In early 2009, the USFS agreed to undertake appropriate NEPA analysis before issuing any NTP. Private mineral owners challenged the agreement arguing that the USFS “lacked sufficient regulatory authority over the dominant mineral estate to restrict or bar drilling activities for the length of time required to complete the proposed environmental analysis.” On December 15, 2009, U.S. District Judge Sean J. McLaughlin granted an injunction, enjoining the USFS from requiring the preparation of a NEPA document as a precondition to the exercise of private oil and gas rights in the Allegheny National Forest. This decision was followed by a declaratory judgment action which was confirmed by the Third Circuit.

During this same time period, the USFS was in the process of updating a 1986 plan for managing the Allegheny National Forest. In 2007 a new plan restricting drilling in the forest was approved. The industry groups filed their lawsuit on May 27, 2008. After review, the USFS chief agreed that the new provisions were invalid and overstepped the agency’s authority. The USFS began revising the rules but stopped after Judge Laughlin’s December 2009 order. Because the USFS has done nothing to implement the 2007 rules or change the existing 1986 procedures, Judge Hornak determined that the lawsuit could be dismissed without prejudice, preserving the “ability of the Plaintiffs to petition to reopen this case and pick up where they left off, should the Forest Service resume the challenged activity by discontinuance of its adherence to the 1986 Plan.”

Seitel Data Ltd. V. Center Township, et al., Case No. 492 M.D. 2013, In the Commonwealth Court of Pennsylvania, October 3, 2013

Seitel Data Ltd. V. Shippingport Borough, et al., Case No. 493 M.D. 2013, In the Commonwealth Court of Pennsylvania, October 3, 2013

Seitel Data Ltd. V. Greene Township, et al., Case No. 494 M.D. 2013, In the Commonwealth Court of Pennsylvania, October 3, 2013

Seitel Data Ltd. (”Seitel”) conducts seismic surveys108 in several Pennsylvania counties and provides the data to oil and gas companies. Seitel entered into contracts with property owners in Center Township, Shippingport Borough, and Greene Township, which contracts provided that the company had the right to conduct seismic surveys on and across these private properties. Seitel also obtained the necessary permits from the Pennsylvania Department of Environmental Protection and the Pennsylvania Department of Transportation, including a blasting activities permit.

108 Seismic testing involves the placement of devices known as geophones 220 feet from one another to measure the vibrations from a “thumper truck,” which drives down roads and thumps the ground with heavy metal plates. If thumping fails to produce the necessary vibrations, small explosives are detonated underground to provide the vibrations.

69

Seitel filed these three lawsuits alleging that each community either enacted or considered enacting resolutions regulating seismic activities, creating a “pattern of conduct…that evinces unreasonable delay and ever-changing requirements for Seitel to fulfill in order to conduct seismic activities.” Seitel claimed that these ordinances violated Act 13, the state’s statute regulating gas drilling, parts of which had been declared unconstitutional.109

The municipalities countered that the court lacked subject matter jurisdiction because there was no ordinance to invalidate or enjoin since Center and Shippingport never passed an ordinance prohibiting or restricting seismic testing and Greene rescinded its ordinance.

On March 7, 2014, the court granted the municipalities’ objections due to lack of subject matter jurisdiction and transferred the cases to the Court of Common Pleas of Beaver County. On April 8, 2014, the Commonwealth Court of Pennsylvania denied Seitel’s application for reargument en banc.

Seitel Data Ltd. v. Hopewell Township, et al., Case No. 4 WAP 2014, In the Supreme Court of the State of Pennsylvania

In August 2013, Seitel Data Ltd. (“Seitel”) sued Hopewell Township, seeking permission to conduct seismic testing on local roads despite the town’s ordinance restricting that testing. In September, the Commonwealth Court forbade the town from enforcing its ordinance. One month later, Seitel was sued by a resident and the water authority, who stated that the testing could damage infrastructure beneath some roads. Then Hopewell Township officials sent out automated calls regarding the testing, advising the residents to remove, destroy or prohibit Seitel from placing seismic testing equipment in the town’s rights-of-way.

On January 31, 2014, the Commonwealth Court granted a preliminary injunction, barring Hopewell Township officials from preventing Seitel from placing its equipment. Hopewell has appealed this order to the Pennsylvania Supreme Court, citing lack of jurisdiction under Act 13 since the ordinance has been rescinded.

Litigation Involving Oil and Gas Lease Disputes

Coastal Oil and Gas Corp. v. Garza Energy Trust, 268 S.W.3d 1 (Tex. 2008)

In this case, the Plaintiff attempted to recover damages from an operator using hydraulic fracturing on a neighboring mineral lease by alleging that the hydraulic fracturing fluids unlawfully drained the Plaintiff’s mineral resources.110 Plaintiff’s case was based on the theory

109 See Anschutz Exploration Corporation v. Town of Dryden and Town of Dryden Town Board, 35 Misc.3d 450, 940 N.Y.S.2d 458 (N.Y. Sup. Ct. 2012), supra. 110 In Garza, the parties agreed that hydraulic fracturing fluids and proppants had crossed the property line. Garza, 268 S.W.3d at 7. The parties disagreed on whether the “effective length” (the area where the hydraulic fracturing

70

that hydraulic fracturing fluids entered the property and caused damage in the form of enhanced drainage of hydrocarbons from the Plaintiff’s property to the Defendant’s property.

In previous cases, Texas courts established that if an operator drills a well that originates on the Defendant’s land but crosses underneath the surface into another person’s mineral rights (a “slant well”), the neighboring landowner has a cause of action against the operator.111 However, the court distinguished hydraulic fracturing from slant drilling because hydraulic fracturing merely enhances the flow of hydrocarbons from one mineral lease to another where it is lawfully extracted. In contrast, a slant well actually crosses into the neighbor’s property, extracting the minerals directly from the neighbor.112

Ultimately, the court ruled that drainage caused by hydraulic fracturing is not a form of trespass, but rather is permitted by the rule of capture, which under the common law allows a mineral leaseholder to collect all of the oil that it can through a well drilled on its own lease, even if the result is to drain hydrocarbons out from under another’s lease.113 As noted above, a claim for trespass in Texas requires the claimant to establish that he has been injured by the Defendant’s actions.114 Here, the Plaintiff could not show injury because damages for drainage were barred by the rule of capture.115 Thus, the court did not have the opportunity to rule on whether the entry of hydraulic fracturing fluid into another’s land that causes injury is a trespass.

Because the Court left this issue open, property owners who believe that they have been injured by hydraulic fracturing will continue to attempt to bring claims for trespass. If a Court were to rule that pumping hydraulic fracturing fluid into another’s land is actionable, potential damage claims could include damages for injury to (1) groundwater/well water, (2) the subsurface mineral interest, or (3) in very unusual cases, the surface estate. The practice of horizontal drilling increases the length of the bore hole and thereby increases the area potentially affected by hydraulic fracturing. In this regard, the practice of horizontal drilling may increase the sphere of potential plaintiffs who may bring an action for trespass.

Wiser, et al v. EnerVest Operating LLC and Belden & Blake Corporation, No. 3:10-cv-00794- DEP (N.D. N.Y., July 2, 2010)

In 1999 and 2000, numerous property owners entered into 10-year oil and gas lease agreements with EnerVest Operating LLC and Belden & Blake Corporation (“Defendants”). Landowners

cracks are actually increasing production at the well) crossed the property line. Id. However, the distinction did not factor into the court’s ruling. 111 Id. at 14. 112 Id. 113 Id. at 13. 114 Id. at 12. 115 Id. at 13.

71

were paid $3.00 per acre to sign and offered 12.5% royalty payments.116 The leases were subject to an indefinite extension should drilling occur, and Defendants were required to pay annual delay rentals.

RENTAL PAYMENT – This lease is made on the condition that it will become null and void and all rights hereunder shall cease and terminate unless work for the drilling of a well is commenced on the leased premises or lands pooled herewith within ninety (90) days from the date of this lease…, or unless the Lessee shall pay to the Lessor, in advance, every twelve (12) months until work for the drilling of a well is commenced, the sum of $______[calculated on the basis of number of acres] for each twelve (12) months during which the commencement of such work is delayed.

During the 10-year term, Defendants did not develop the land nor did they drill or have any operations on the properties. Seeking to extend the leases, Defendants asserted claims to the land under the “force majeure” clause of the lease. The alleged “force majeure” is New York Governor David Paterson’s 2008 moratorium on drilling, which Defendants argue exempted them from paying the delay rentals and would keep the leases open until the end of the moratorium.

On March 22, 2011, the U.S. District Court ruled for the Plaintiffs, declaring that the leases were null and void for non-payment of delay rentals under the “unless” leases.

Pollock, et al. v. Energy Corporation of America, No. 2:10-cv-01553 (W.D. Pa. Nov. 30, 2010)

This lawsuit was originally filed by ten landowners on November 22, 2010 and was amended as a class action on March 4, 2011. On September 16, 2013, U.S. Magistrate Judge Robert C. Mitchell determined that two subclasses of plaintiffs met class certification requirements: (1) landowners who allegedly had interstate pipeline charges withheld from their royalty payments and (2) landowners who allegedly had marketing fees deducted after the gas had been sold. The U.S. District Judge approved this certification on September 30, 2013.

In January 2013, the court partially granted ECA’s motion for summary judgment by dismissing plaintiffs’ claims that ECA used the wrong gas prices, took excessive or unauthorized expense deductions, and underpaid oil and gas royalties. As for plaintiffs’ motion for summary judgment, the court ruled that ECA improperly deducted charges for interstate transportation costs incurred after ECA sold and transferred title to the gas.

116 Plaintiffs alleged that, at the time of the filing of the complaint, land in the Marcellus Shale was being leased at a rate of $5,700 to $7,000 per acre in bonus payments and between 20% and 25% royalty payments.

72

At a March 19, 2014 status conference, the court ordered the plaintiffs to complete damages discovery before June 15, 2014 and to produce an expert report by July 15, 2014. Mediation is to be scheduled by July 31, 2014, with a status conference scheduled for August 12, 2014.

Richard L. Cain v. XTO Energy Inc. and Waco Oil & Gas Co. Inc., No. 1:11-cv-00111-IMK, (N.D. W. Va., July 22, 2011) (originally filed in the Circuit Court of Marion County, W.Va., Case No. 11-c-165, June 21, 2011)

Richard L. Cain (“Plaintiff”) filed a lawsuit in West Virginia state court on June 21, 2011 against XTO Energy Inc. (“XTO”) and Waco Oil & Gas Co. Inc. (dismissed on March 29, 2012). Cain v. XTO Energy Inc.. and Waco Oil & Gas Co. Inc., No. 11-c-165 (Circuit Court of Marion County, West Virginia, June 21, 2011). The case was removed to federal court on July 22, 2011. On March 29, 2012, the Plaintiff’s Motion to Remand was denied.

On April 26, 2012, the Plaintiff filed his First Amended Complaint where he asserts causes of action for trespass, excess user, acts and omissions beyond the contemplation of the parties, unjust enrichment, and quantum meruit, as well as seeking injunctive relief. For trespass, the Plaintiff claims that XTO has no right to (1) enter his property for any purpose relating to oil and gas exploration and production, (2) drill well bores horizontally into neighboring oil and gas tracts, (3) frac geological formations on neighboring tracts from his land, (4) pipe gas from neighboring tracts across his land, and (5) build or alter roads for any oil and gas activities.

Plaintiff’s excess user and acts and omissions beyond the contemplation of the parties claims rest on a severance deed signed in 1907. According to the Plaintiff, XTO’s use of his property exceeds any rights granted under the 1907 deed and that “XTO’s activities are beyond those in usage and custom of the natural gas industry at the time of the 1907 deed.” The Plaintiff also claims that XTO’s activities will disturb more acreage, destroy more property, create more hazards, take more time, and cause more traffic with heavy equipment than was contemplated by the parties to the 1907 deed.

For unjust enrichment, the Plaintiff seeks all of XTO’s “profits and monies obtained in contravention of Plaintiff’s rights.” Under quantum meruit, the Plaintiff “expects to be paid for the properties which XTO used and continues to use for its exclusive financial benefit.” XTO filed a Motion to Dismiss Plaintiff’s claims, arguing that the unjust enrichment and quantum meruit are not allowed under West Virginia law and that the excess user and contemplation claims are not recognized as independent causes of action under West Virginia law. This motion was denied on August 9, 2013.

On July 2, 2012, the Plaintiff filed a Motion to Certify Questions of Law to the Supreme Court of Appeals of West Virginia (“First Certification Motion”). The questions that Plaintiff sought to certify are:

73

Is a person who obtains a benefit by an act of trespass or conversion, by comparable interference with other protected interests in tangible property, or in the consequence of such an act by another, liable in restitution to the victim of the wrong?

May a defendant be liable for interference with real property in an amount that exceeds quantifiable injury to the property owner on the principle that restitution is justified because the advantage acquired by the wrongdoer is one that should properly have been the subject of negotiation and payment?

In addition, on that same date, the Plaintiff filed a Motion to Certify Question or In the Alternative for Partial Summary Judgment and Permanent Injunctive Relief (“Second Certification Motion”), with the question being whether XTO “has the right to use Mr. Cain’s surface for well pads, access roads, and other disturbance and operations to drill gas well bore holes into neighboring mineral tracts that did not underlie his surface at the time of the severance of his surface from the minerals, where those severance deeds expressly limit the Defendant’s rights to gas within and underlying the tract.” XTO filed its opposition to each of Plaintiff’s motions on July 16, 2012 and August 6, 2012 respectively.

In an Order dated March 28, 2013, the Court denied the First Certification Motion as not being ripe for disposition in that “the question of damages…is highly fact-specific, and the factual record on the issue of damages is, as of yet, underdeveloped.” The Court did order certification of the question raised in the Second Certification Motion as to whether the severance deed gives XTO the right to drill horizontal wells on Plaintiff’s property “in order to extract oil and gas from a shared pool of oil and gas estates.” At a hearing on May 10, 2013 and by written order dated May 16, 2013, the Court withdrew its March 28th Order, deeming that the certification to the Court of Appeals of West Virginia “is premature at this time.”

This case was settled at mediation in November 2013 and dismissed by the court on December 23, 2013.

Alexander, et al v. Chesapeake Appalachia LLC and Statoilhydro USA Onshore Properties, Inc., No. 3:11-cv-00308-DNH-ATB (N.D. N.Y., March 18, 2011)

Aukema, et al v. Chesapeake Appalachia LLC and Statoilhydro USA Onshore Properties, Inc., No. 3:11-cv-00489-DNH-ATB (N.D. N.Y., April 29, 2011)

More than 250 Plaintiffs sued Chesapeake Appalachia LLC (“Chesapeake”) and Statoilhydro USA Onshore Properties, Inc. (“Statoilhydro”) (collectively, “Defendants”), complaining that the Defendants violated New York’s deceptive trade practices statutes concerning extension of the terms of approximately 200 oil and gas leases in several New York counties. One group of leases was executed in 1999 or 2000 and had a 10-year term, paying $3.00 per acre/year, and

74

another group of leases executed in 2004 and 2005 with a five-year term, paying $5.00 per acre/year.117 All of the leases expired. No wells were drilled on any of the properties. No oil or gas in paying quantities was ever extracted. No royalties were paid to the Plaintiffs.

As each lease expired, the Defendants filed notices and affidavits of extension of the leases claiming that continued tender of delay rentals under a “Delay in Marketing” clause maintained the leases in full force and effect. Alternatively, the Defendants claimed that under a “covenants” or “force majeure” clause, the leases were not subject to termination “due to failure to comply with obligations if compliance is prevented by federal, state, local law, regulation, or decree.” The Defendants asserted that a suspension of the granting of generic permits to use high-volume hydrofracking with horizontal drilling in the Marcellus Shale is a force majeure event which extends the leases. The Plaintiffs objected to these extensions, but encumbrances remain against their property. The Plaintiffs sought the termination of their leases and compensatory damages.

In the Alexander case, on March 20, 2012, the Court ordered that all Plaintiffs with arbitration clauses in their lease contracts must arbitrate their claims and that the case was stayed pending the arbitration. On February 15, 2013, the parties provided the Court with an update, explaining that no arbitration had taken place because both sides believed it was the burden of the other party to initiate the arbitration process. On February 21, 2013, the Court issued a Decision and Order, dismissing the case and directing the parties to arbitrate.

The Aukema case was dismissed on November 15, 2012, with the Court concluding that “the leases terminated at the conclusion of their primary terms, and Defendants cannot invoke force majeure, the doctrine of frustration of purpose, or the prescribed payments clauses to extend the leases.” This order was appealed by the Defendants and cross-appealed by the Plaintiffs to the Second Circuit, Case No. 12-5092 and Case No. 12-5108 respectively. On September 3, 2013, the parties advised the Second Circuit that they had reached a settlement agreement. Chesapeake agreed to release the leases.

Koonce v. Chesapeake Exploration, LLC and CHK Utica, LLC, No. 2012CV00136 (Ohio Ct. Com. Pl., March 7, 2012)

This lawsuit was originally filed in the Court of Common Pleas, Columbiana County, Lisbon, Ohio, Cause No. 2012CV00136 on March 7, 2012, and then removed to the U.S. District Court for the Northern District of Ohio on March 27, 2012 (Case No. 4:12-cv-00736-BYP). The parties filed a Stipulation to Remand on April 9, 2012, sending the case back to state court.

117 In their petition, Plaintiffs allege that in November 2008, Statoilhydro paid about $5,800 per net acre for 32.5% of Chesapeake’s interests in the leases. Based on this, the Plaintiffs assert that the true market value of their leaseholds was approximately $17,400 per acre.

75

In the Second Amended Complaint filed on October 10, 2012, a group of approximately 50 landowners (“Plaintiffs”) sought to void their oil and gas leases with Chesapeake Exploration, LLC, CHK Utica, LLC, and Total E&P U.S.A., Inc. (collectively all three referred to as “Defendant Companies”), four land agents, five notary publics, and the Columbiana County Recorder. The Plaintiffs alleged that the Defendant Companies misrepresented environmental disruptions caused by hydraulic fracturing and concealed the land rights’ true profit potential. The Plaintiffs claimed that the land agents failed to present “truthful and accurate information” about the leases, resulting in many landowners receiving less than 1% of the fair market value for signing bonus payments. The Plaintiffs also claimed that they were tricked into signing leases without appropriate lease clauses to protect them from the risks and disruptions associated with horizontal drilling and hydraulic fracturing. As for the notary publics, the Plaintiffs claimed that they did not appear nor execute the leases before these officials, making the leases null and void; and then the Columbiana County Recorder incorrectly filed these void leases in the county’s deed records.

The Plaintiffs’ original leases with Anschutz Exploration Corporation were executed between 2008 and 2010, with primary terms of three to five years, continuing in effect if the Defendant Companies were conducting operations or have an active well on the land. These leases have a “fair value right” clause (or “Preferential Right to Renew” clause). This clause allowed landowners to seek fair value from a third-party offeror for the leases, with the leaseholder having the chance to match or better that third-party offer. After acquiring the leases in 2010, the Plaintiffs contend that the Defendant Companies intentionally modified this clause in order to prevent landowners from receiving third-party offers and that the Defendant Companies publicly stated they would not honor the fair value clause in the original leases. The Plaintiffs alleged that they relied on this clause when signing the leases and the Defendant Companies’ actions constituted a material breach and repudiation of the leases.

On January 25, 2012, Chesapeake Exploration LLC (“Chesapeake”) and CHK Utica LLC filed a separate declaratory judgment action118 concerning the “fair value right” provision. This declaratory action was filed against numerous landowners who threatened to terminate the leases unless Chesapeake matched or “bettered” third-party offers that they have received. On October 30, 2012, the Court found no ambiguity in the provision and ruled that Chesapeake has the right to match a bona fide offer and renew the lease; and if Chesapeake chose not to match the offer, the lease runs its course. This lawsuit was closed on November 20, 2012. The landowners filed

118 Chesapeake Exploration LLC and CHK Utica, LLC v. Catlett Quality Plumbing & Heating, Inc., et al, No. 5:12- cv-00188 (N.D. Ohio, Jan. 25, 2012), on appeal to the U.S. Court of Appeals for the 6th Circuit, Case No. 12-4466 and Case No. 12-4517, filed Dec. 6, 2012 and Dec. 17, 2012 respectively, consolidated on May 1, 2013. The case was argued before the 6th Circuit on August 1, 2013. On October 30, 2013, the 6th Circuit ruled that the landowners had no right to terminate Chesapeake’s oil and gas leases if the company refused to match third-party offers to lease the land. See Chesapeake Exploration LLC and CHK Utica, LLC v. Catlett Quality Plumbing & Heating, Inc., et al, 2012 U.S. Dist. LEXIS 156169, 2012 WL 5364259 (N.D. Ohio Oct. 30, 2012).

76

appeals with the U.S. Court of Appeals for the Sixth Circuit (Case Nos. 12-4466 and 12-4517). Arguments were held on August 1, 2013.

Meanwhile, in state court, on September 12, 2012, the parties in the Koonce case and two other cases (Coniglio, et al v. Chesapeake Exploration LLC, et al., Case No. 2012CVH27102, in the Carroll County, Ohio Court of Common Pleas and William R. Green vs. Chesapeake Exploration, et al., Case No. 2012CV01223, in Stark County Common Pleas Court) signed a Letter Agreement providing that, at the time of a ruling in any one of these three related cases concerning the “fair value right” provision (Paragraph 14 in the lease), all other claims filed by the parties in that case would be dismissed without prejudice to allow the “fair value right” ruling to be a final appealable order.

On November 15, 2012, in a combined opinion and order in the Koonce and Coniglio cases that denied both sides’ motions for summary judgment, the Court ruled that, “as a matter of law…paragraph 14 of the…lease gives the plaintiff-landowner-lessors a right to accept a competitor’s offer during the primary term and during the first year after all other lease rights end, if Chesapeake fails to match that competitor’s offer pursuant to paragraph 14, provided that the replacement lease cannot interfere with Chesapeake’s rights to maintain inactive speculation during the primary term, or its rights to maintain continuing operations or production under” other provisions of the lease. A final judgment was signed on January 11, 2013.

Caldwell v. Kriebel Resources Co., LLC, et al., Case No. 2012-14-CD, 2012 WL 8745184 (Court of Common Pleas, Clearfield County, Aug. 3, 2012), affirmed at 72 A.3d 611, 1305 WDA 2012 (Pa. Super. Ct. June 21, 2013), hearing declined by Pennsylvania Supreme Court, November 26, 2013)

On November 26, 2013, the Pennsylvania Supreme Court denied an appeal of a Superior Court decision which held that a gas lessee has no obligation to drill into the Marcellus Shale formation.

In the Court of Common Pleas, the plaintiff landowners sought a declaratory judgment that would allow them to terminate their lease agreement with the defendant gas company. The company had drilled a series of shallow wells on the plaintiffs’ property, which produced gas in paying quantities, but did not drill deeper wells into the Marcellus Shale formation. The Court of Common Pleas dismissed the suit, holding that the company was developing the property as required by the lease. The court also rejected plaintiffs’ argument that minimum royalty payments should be based on the natural gas potentially available in all strata underlying the property, finding instead that a well should be deemed to have produced in paying quantities if it resulted in any profit whatsoever.

77

The Pennsylvania Superior Court affirmed the trial court holding by stating that company was not “required to drill additional wells to different depths to completely develop the entire property.”

Under Pennsylvania law, we are not authorized to impose an implied duty on the lessee to develop the various strata in light of the language contained in their contract. This is so particularly in light of the fact that defendants are producing gas pursuant to the agreement, a fact that appellants acknowledge.”

With the state Supreme Court denying the appeal, the Superior Court’s decision based on the strict language of the lease remains controlling Pennsylvania law.

Canaan Wildlife Preserve, Inc., et al v. Chesapeake Energy Corporation, et al., Case No. 2:13- cv-02064-RTD (W.D. Ark., March 6, 2013)

In this class action lawsuit, the Plaintiffs allege that Defendants119 fraudulently skimmed $5 million off royalty payments to thousands of oil and gas leaseholders over a 25 year period. They claim that the Defendants underpaid royalties, added fraudulent fees and charges to billing statements, misreported gas volume purchases, and paid less than the materials were actually worth. They seek more than $5,000,000 in damages.

In a motion to dismiss, the Defendants argue that Plaintiffs do not allege that any particular Defendant has caused them harm, only that they have been injured by “one of more Defendants.” On October 1, 2013, the Magistrate Judge issued a report and recommendations denying the motion, finding that the Plaintiffs had sufficiently stated their claims. On February 27, 2014, the U.S. District Judge adopted the Magistrate’s report and recommendations.

The court is considering motions from both sides to extend dates concerning class certification, with plaintiffs’ pleadings due by December 1, 2014 and a hearing to be scheduled for May 2015.

EQT Production Company v. John Opatkiewicz, et al., Case No. GD-13-013489, In the Court of Common Pleas of Allegheny County, Pennsylvania

On July 9, 2013, Pennsylvania Governor Tom Corbett signed a law giving drillers the ability to pool leased properties into one unit for horizontal wells, as long as the oil and gas contracts in effect do not prohibit these combinations. This provision is the basis of a complaint filed by EQT Corporation on July 22, 2013 in the Court of Common Pleas against at least 57 landowners and one golf course in Allegheny County, who hold old oil and gas contracts without pooling provisions.

119 Chesapeake Energy Corporation, Chesapeake Operating, Inc., Chesapeake Energy Marketing, Inc. Chesapeake Midstream Operation, LLC, Arkansas Midstream Gas Services Corp., Chesapeake Midstream Gas Services, LLC, BP America Production Company, BP Energy Company, BHP Billiton Petroleum (Fayetteville), LLC, BHP Billiton Petroleum (Arkansas), Inc., and BHP Billiton Marketing, Inc.

78

EQT, who had been negotiating with landowners in the county for access to their properties, accused them of blocking the company from conducting surveys on their land to determine where to drill for shale gas. EQT requested an injunction that it can access the properties and engage in horizontal drilling on the pooled properties.

In their answer, the defendants allege that the pooling law “constitutes an unconstitutional taking of…private property for non-public use and without just compensation…” and deprives them of “rights to acquire, possess, and protect property in violation of” the U.S. Constitution and the state’s constitution. They argue that the new law should not be applied retroactively to their leases, the majority of which do not contain pooling provisions, and that the leases are invalid to the extent that EQT has not made the required payments under the leases to store natural gas on their property.

On December 26, 2013, with the memorandum opinion issued on January 8, 2014, the judge ordered the defendants to allow an oil and gas production company “reasonable ingress, egress, access to and use of the…properties of…sixteen (16) oil and gas leases identified in the Amended Complaint for the purpose of performing seismic testing.” The company was ordered to post a bond of $25,000 before beginning the testing.

On January 30, 2014, shortly after the defendants filed a motion for partial judgment on the pleadings in which they argued the unconstitutionality of the pooling law, the judge decided to dismiss her January 8th order and agreed to reconsider her memorandum opinion.

In an order dated April 8, 2014, the judge concluded that the pooling statute (section 34.1 of the Oil and Gas Lease Act) “does not violate the Constitution of the Commonwealth of Pennsylvania nor the United States Constitution, and that as such, where EQT has the right to develop multiple contiguous oil and gas leases separately, it may develop those leases jointly by horizontal drilling unless expressly prohibited by a lease.”

May, et al. v. BHP Billiton Petroleum (Fayetteville) LLC, No. 4:13-cv-0494 (E.D. Ark., August 23, 2013)

This is a class action lawsuit in which Plaintiffs allege that, by failing to drill more than one well per lease, BHP Billiton Petroleum (Fayetteville) LLC (“BHP Billiton”) breached an implied covenant requiring an oil and gas lessee to act with reasonable diligence to develop the lease. Plaintiffs seek cancellation of the leases.

BHP Billiton has filed a motion to dismiss and to strike class allegations, arguing that the Plaintiffs’ claims are barred by the terms of the leases which contain language that is inconsistent with the implied covenant of reasonable development. The leases state that the leases will remain in effect according to their terms so long as production continues on the property, notwithstanding any other contractual provision, whether express or implied, to the contrary.

79

BHP Billiton asserts that, since it drilled at least one producing well on each leased property, the terms of the lease are satisfied.

In an order dated April 2, 2014, the court struck “the class allegations…for lack of predominate common issues” but allowed the claims “which arise from BHP’s implied covenant to reasonably develop” to go forward on the merits.

Demchak Partners Limited Partnership, et al. v. Chesapeake Appalachia, L.L.C., No. 3:13-cv- 02289 (M.D. Pa. Aug. 30, 2013)

In October 2012, the class action Plaintiffs confronted Chesapeake Appalachia LLC (“Chesapeake”) with allegations that Chesapeake violated leases by deducting from their royalty checks post-production costs for gathering, dehydration and compression of the gas taken from their property. Plaintiffs argued that their leases contained a “Market Enhancement Clause,” which expressly precluded Chesapeake from charging them for transforming the gas into its “marketable” form or make the gas ready for sale or use, but would allow Chesapeake to deduct a pro-rata share of these costs after the gas had been placed in a marketable form or is ready for sale or use. Plaintiffs contended that the gas is not actually “marketable” until it meets the quality and pressure specifications of the interstate pipeline into which it is delivered; and that, by deducting costs that were incurred prior to the gas entering the transmission pipeline, Chesapeake underpaid the royalties due under the lease. In opposition, Chesapeake contended that the gas produced or to be produced under plaintiffs’ leases was marketable at the wellhead and thus was entitled to make the deductions.

With an arbitration clause in the leases, the parties hired retired Judge Edward N. Cahn, a mediator with Blank Room LLP, to help settle the questions raised. Judge Cahn met with the parties on June 18, 2013, and then for more than two months negotiated with each side to reach a proposed $7.5 million settlement. On August 30, 2013, the plaintiffs filed their Class Action Complaint and the Unopposed Motion for Preliminary Approval of Class Action Settlement.

The proposed settlement agreement requires Chesapeake to pay the class action plaintiffs 55% of post-production costs for gathering, dehydration and compression prior to September 1, 2013 and 27.5% of post-production costs until the effective date of the settlement. If the settlement is approved, Chesapeake will implement a revised royalty calculation methodology that provides a 27.5% reduction in costs for gathering, dehydration, and compression borne by the class action plaintiffs. After the settlement, these plaintiffs will continue to bear 100%, on a pro-rata basis, of the transportation costs that are incurred after the gas has entered the interconnect point of a transmission pipeline.

As of the date of this Analysis, the Class Action Settlement has not yet been approved. Pending before the court are several motions, all of which include Russell and Gayle Burkett (the “Burketts”) who are other landowners involved in an arbitration concerning the contract

80

provisions. The Burketts want to intervene in the Demchak case and consolidate the Demchak case with their arbitration. Chesapeake has filed a motion for a permanent injunction to enjoin the Burketts from pursuing their “putative class [arbitration] proceedings related to the Market Enhancement Clause…” To make matters more confusing, on December 30, 2013, Chesapeake filed a lawsuit for declaratory and injunctive relief against the Burketts, seeking declarations that the Court should decide whether class arbitration is available pursuant to the Burketts’ Lease and that class arbitration is not available pursuant to that lease.120 Additional confusion has been created by the arbitration panel ruling on January 28, 2014, that it, not the court, should decide whether Chesapeake agreed to arbitrate with the Burketts on a class basis. Chesapeake has asked the U.S. District Court to vacate that ruling.

Note that, after many discussions in the Pennsylvania legislature, on July 9, 2013, Governor Tom Corbett signed into law S.B. 259 which requires royalty check “transparency.” Royalty check statements must provide a range of details, including well identification information, the price received per barrel, Mcf or gallon, the net value of total sales after deductions, the owners’ percent of interest in production and share of the total value of the sales prior to deductions, and the total amount of taxes and deductions permitted under the lease.

Wisdahl, et al. v. XTO Energy, Inc., Case No. 53-2013-cv-01188 (In District Court of Williams County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00136, on Nov. 15, 2013

Wisdahl, et al. v. Crescent Point Energy U.S. Corp., Case No. 53-2013-cv-01189 (In District Court of Williams County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00139, on Nov. 15, 2013

Miller Family Partnership, et al. v. HRC Operating, LLC, Case No. 53-2013-cv-01190 (In District Court of Williams County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00137, on Nov. 15, 2013

Sorenson, et al. v. Burlington Resources Oil & Gas Company, LP, Case No. 27-2013-cv-00242 (In District Court of McKenzie County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00132, on Nov. 14, 2013

Singer, et al. v. Statoil Oil & Gas LP, Case No. 27-2013-cv-00243 (In District Court of McKenzie County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-001338 on Nov. 15, 2013

120 Chesapeake Appalachia, LLC v. Russell E. Burkett and Gayle Burkett, Case No. 3:13-cv-03073, In the U.S. District Court for the Middle District of Pennsylvania

81

Kummer, et al. v. Continental Resources, Inc., Case No. 27-2013-cv-00244 (In District Court of McKenzie County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00135, on Nov. 15, 2013

Border Farm Trust, et al. v. SM Energy Company, Case No. 27-2013-cv-00245 (In District Court of McKenzie County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00140, on Nov. 15, 2013

Border Farm Trust, et al. v. Samson Resources Company, Case No. 12-2013-cv-00067 (In District Court of Divide County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00141, on Nov. 15, 2013

Vogel, et al. v. WPX Energy Williston, LLC, Case No. 31-2013-cv-00162 (In District Court of Mountrail County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00133, on Nov. 15, 2013

Vogel, et al. v. Marathon Oil Company, Case No. 31-2013-cv-00163 (In District Court of Mountrail County, North Dakota, Northwest Judicial District)

Lawyer, et al. v. Kodiak Oil & Gas (USA) Inc., Case No. ______(In District Court of Williams County, North Dakota), removed to U.S. District Court for North Dakota, No. 4:14-cv-00014, on February 10, 2014

Lawyer, et al. v. EOG Resources, Inc., Case No. 53-2014-cv-0043 (In District Court of Williams County, North Dakota), removed to U.S. District Court for North Dakota, No. 4:14-cv-00009, on January 31, 2014

Hansen, et al. v. Hunt Oil Company, Case No. 13-2014-cv-00008 (In the District Court of Dunn County, North Dakota), removed to U.S. District Court for North Dakota, No. 1:14- cv-00021, on February 20, 2014

Sheryle J. Olson Family Mineral Trust, et al. v. Hess Corporation and Hess Bakken Investments II, LLC, Case No. 13-2014-000007 (In the District Court of Dunn County, North Dakota, Southwest Judicial District), removed to U.S. District Court for North Dakota, No. 1:14-cv-00020, on February 18, 2014

Fourteen class actions were filed in North Dakota by mineral owners alleging lost income due to the flaring of natural gas by various oil and gas producers, including EOG Resources, XTO Energy, Burlington Resources Oil and Gas, Continental Resources, Crescent Point Energy, HRC Operating, Hess Corporation, Hess Bakken Investments II, Hunt Oil Company, Kodiak Oil & Gas (USA), Marathon Oil, Samson Resources, SM Energy, Statoil, and WPX Energy.

82

The lawsuits allege that the producers have violated several North Dakota Industrial Commission rules relating to flaring and paying royalties for flared gas. After an oil well begins to produce, North Dakota allows limited flaring during the first year. After one year, the producer must apply for a written exemption for any future flaring. If the producer does not ask for the exemption, royalties and state taxes on the flared gas must be paid.

The lawsuits allege that these various producers have flared gas without the proper authorization and therefore, owe royalties on “(a) gas flared from a well one year after the first production without applying for and obtaining a flaring exemption; (b) gas flared from a well within the first year of production under an order issued by the Industrial Commission limiting the maximum barrels of oil to be produced per day until the well is connected to a gathering system and processing plant…; and (c) gas flared within the first year of production even though the operator reported the well was physically connected to a gathering system and processing plant.”

The Plaintiffs claim that they lost millions of dollars in royalties due to producers’ practice of burning off large quantities of gas rather than selling it.

In each of the thirteen federal lawsuits, the Defendants filed a motion to dismiss, arguing that the Plaintiffs have failed to exhaust their administrative remedies and that there is no private right of action for damages under the North Dakota statutes referenced by the Plaintiffs. On March 14, 2014, the U.S. District Court agreed with Defendants, dismissing the lawsuits. The Court stated that the cases rest “upon the resolution of fairly technical and complex questions of fact and law,” including “(1) the volume of gas flared…, (2) the value of such flared gas; and (3) the application of the relevant Industrial Commission orders that pertain to each well.” The Court concluded that “[n]o decision-maker is better equipped to resolve such issues than the Industrial Commission itself which is possessed of the authority, experience, and expertise to make such determinations.”

Texas Mesa Vista 2000, Ltd. v. Chesapeake Operating, Inc., et al., Cause No. 048-271363-14, In the 48th Judicial District Court of Tarrant County, Texas (April 1, 2014)

Snow, et al. v. Chesapeake Operating, Inc., et al., Cause No. 342-271361-14, In the 342nd Judicial District Court of Tarrant County, Texas (April 1, 2014)

Fort Worth Independent School District v. Chesapeake Energy Corporation, et al., Cause No. 236-272136-14, In the 236th Judicial District Court of Tarrant County, Texas (May 15, 2014)

Star-Telegram, Inc. v. Chesapeake Exploration LLC, et al., Cause No. 096-272142-14, In the 96th Judicial District Court of Tarrant County, Texas (May 16, 2014)

83

Fort Worth Housing Finance Corporation, et al. v. Chesapeake Energy Corporation, et al., Cause No. 352-272138-14. In the 352nd Judicial District Court of Tarrant County, Texas (May 16, 2014)

Royalty owners in the Barnett Shale filed these lawsuits against Chesapeake Operating, Inc., Chesapeake Energy Corporation, and/or Chesapeake Exploration LLC accusing the companies of underpaying royalties on gas produced from wells on the leased properties.

These lawsuits follow in the wake of several earlier filed lawsuits121 complaining that Chesapeake Operating, Inc. was improperly charging royalty owners for production costs associated with drilling and using affiliated companies to buy gas at the wellheads to secure lower prices on which royalties were paid. The royalty owners question the way the company calculates royalties and seek disclosure of information about the company’s gathering, selling and processing of gas produced from their leases.

Lawsuits Brought by Citizens, States, and Environmental Groups

Hamblet v. James Martin, in his official capacity as Director, Office of Oil and Gas, West Virginia Department of Environmental Protection; Office of Oil and Gas, West Virginia Department of Environmental Protection; and EQT Production Company, Case No. 10-P-15 (Circuit Court of Doddridge County, W. Va., May 21, 2010)

EQT Production Company (“EQT”) holds a valid oil and gas lease executed in 1905 which encompasses the property owned by Matthew Hamblet. On March 22, 2010, EQT filed a permit application with the West Virginia Office of Oil and Gas of the West Virginia Department of Environmental Protection (“WVDEP”) to drill a shallow well with a “horizontal leg into the Marcellus” Shale formation. As part of the permit application, EQT provided notice to the surface owners, including Hamblet.

On April 7, 2010, Hamblet submitted comments to the WVDEP in which he complained of prior damage and disturbance to his property from at least four other wells in the area. He further complained that the erosion and sediment control plan was inadequate and that the proximity of drilling waste to surface water presented a failure to protect fresh water resources. Thereafter, EQT submitted additional information in response to Hamblet’s comments. The WVDEP conducted an inspection of the site and found that all the application requirements were satisfied.

121 See Trinity Valley School, et al. v. Chesapeake Operating, Inc., et al., Case No. 3:13-cv-01082, In the U.S. District Court for the Northern District of Texas, Dallas Division (March 13, 2013) , City of Arlington, Texas, et al. v. Chesapeake Exploration, LLC, et al., Cause No. 141-267203-13, In the 141st Judicial District Court of Tarrant County, Texas; and Hyder, et al., v. Chesapeake Exploration, LLC, et al., Cause No. 17-244547-10, In the 17th Judicial District Court of Tarrant County, Texas, affirmed Case No. 04-12-00769-CV, In the 4th Court of Appeals, San Antonio, Texas (holding that the royalty owners were entitled to an overriding royalty free of all production and post-production costs, subject only to their portion of production taxes).

84

On May 21, 2010, Hamblet filed his “Petition for Appeal of Issuance of a Well Permit,” seeking to nullify the drilling permit and stating that the state regulators had not done enough to protect his land and environment. He asserted that EQT’s personnel are “driving around and off the access roads, parking in the meadows in an unorganized way, taking more time than is reasonably necessary to construct the well site, leaving chemicals and trash all over the ground, allowing for the silting of creeks which washes away meadow and destroys creek life and habitat.”

The WVDEP and EQT filed motions to dismiss, arguing that Hamblet did not have the right to appeal the issuance of the permit under any relevant statutory authority. While the Circuit Court concluded that Hamblet did have the right to appeal, it also granted the defendants’ request to submit its ruling to the Supreme Court of Appeals of West Virginia. In answer to the certified question, the appeals court determined that surface owners have no statutorily-defined right to seek judicial review with respect to a permit issued by the WVDEP.

Ouachita Watch League, et al v. Judith L. Henry, Forest Supervisor, Ozark-St. Francis National Forests. United States Forest Service, et al, No. 4:11-cv-425 (E.D. Ark., May 19, 2011)

The Plaintiffs consist of individual citizens residing in Arkansas and several not-for-profit organizations established for “enjoyment, protection, and preservation of the environment and natural resources,” including the Ozark-St. Francis National Forest and Greers Ferry Lake in Arkansas. Seeking an injunction to prevent any additional wells from being drilled in the forest and lake area, the Plaintiffs assert that the United States Forest Service, the Bureau of Land Management, United States Army Corps of Engineers, United States Department of Agriculture, United States Department of the Interior, and their directors and managers (“collectively “Defendants”) failed to comply with the National Forest Management Act, the Mineral Leasing Act for Acquired Lands, the National Environmental Policy Act (“NEPA”), and the rules and regulations implementing NEPA issued by the White House Council on Environmental Quality when the Defendants approved oil and gas exploration activities in or under the lake on September 21, 2010, in a Supplemental Information Report (“SIR”).

Ruling on Plaintiffs’ discovery motions, the Court ordered Defendants to produce the administrative record of documents and information leading to the SIR. Defendants filed the administrative record on December 14, 2012 and then a supplement to that record on November 18, 2013. Currently pending before the Court is Defendants’ motion to dismiss.

85

State of New York v. United States Army Corps of Engineers, et al; No. 1:11-cv-02599 (E.D.N.Y., May 31, 2011)

Delaware Riverkeeper Network, et al v. United States Army Corps of Engineers, et al; No. 1:11-cv-03780 (E.D.N.Y., Aug. 4, 2011)

State of New York v. United States Army Corps of Engineers, et al; No. 1:11-cv-03857 (E.D.N.Y., Aug. 10, 2011)

In all three lawsuits (which were consolidated for pre-trial purposes), the Plaintiffs122 sought to compel the Defendants123 to comply with the National Environmental Policy Act of 1969 (“NEPA”) by requiring them to prepare and make available for public comment a draft environmental impact statement (“EIS”) before proceeding to adopt federal regulations to be administered by the Delaware River Basin Commission (“DRBC”) that would authorize natural gas development within the Basin.124 The DRBC anticipates between 15,000 and 18,000 natural gas wells to be developed using hydraulic fracturing within the Basin. The Delaware River Basin comprises 13,539 square miles, draining parts of New Jersey, New York, Pennsylvania, and Delaware. The Upper Delaware River within the Basin serves as the primary source of clean unfiltered drinking water for 9,000,000 New Yorkers each day and is federally designated as a scenic and recreational river by the United States Park Service.

On June 4, 2012, the Defendants filed motions to dismiss, arguing lack of subject matter jurisdiction, Plaintiffs’ lack of standing, actions not ripe for adjudication, and inapplicability of NEPA to these Defendants. The Court granted these motions on September 24, 2012 and dismissed all three lawsuits.

122 In the first State of New York case, the Plaintiff is the State of New York. In the second State of New York lawsuit, the Plaintiffs are the State of New York and Damascus Citizens for Sustainability, Inc. In the Delaware Riverkeeper Network case, the Plaintiffs are Delaware Riverkeeper Network, Inc., Delaware Riverkeeper, Inc., the Hudson Riverkeeper, and National Parks Conservation Associations. 123 In both State of New York cases, the Defendants are the United States Army Corps of Engineers; Colonel Christopher Larsen, in his official capacity as Division Engineer, North Atlantic Division of the United States Army Corps of Engineers; United States Fish and Wildlife Service; Rowan W. Gould, in his official capacity as Acting Director of the United States Fish and Wildlife Service; United States National Park Service; Jonathan B. Jarvis, in his official capacity as Director of the United States National Park Service; United States Department of the Interior; Kenneth Salazar, in his official capacity as Secretary of the United States Department of the Interior; United States Environmental Protection Agency; Lisa Jackson, in her official capacity as Administrator of the United States Environmental Protection Agency; Delaware River Basin Commission; and Carol Collier, in her official capacity as Executive Director of the Delaware River Basin Commission. In the Delaware Riverkeeper Network, the Defendants are the United States Army Corps of Engineers; Brig. Gen. Peter A. DeLuca, Division Engineer, North Atlantic Division of the United States Army Corps of Engineers; the Delaware River Basin Commission; and Carol Collier, in her official capacity as Executive Director of the Delaware River Basin Commission. 124 In addition to the Plaintiffs and Defendants, numerous groups have intervened on behalf of defendants (American Petroleum Institute, the Independent Petroleum Association of America, and the US Oil & Gas Association) and/or have filed amicus briefs (the City of New York, Chesapeake Bay Foundation, and Susquehanna River Basin Commission).

86

San Juan Citizens Alliance; Colorado Environmental Coalition, Colorado Wild; Oil and Gas Accountability Project, and The Wildness Society v. Mark Stiles, in his official capacity as San Juan National Forest Supervisor and BLM Center Manager of the San Juan Public Lands Center; et al.125; 654 F.3d 1038 (10th Cir. 2011)

The lawsuit filed by several environmental groups (“Plaintiffs”) concerns the Northern San Juan Coal Bed Methane Project (“Project”), which was approved by the federal government Defendants. The Project contemplates the construction of numerous gas wells within the San Juan National Forest and other federal lands. The Plaintiffs claim that the 2007 Record of Decision (“ROD”) approving the Project was unlawful, that the ROD-approved wells violated the Forest’s standards and guidelines protecting riparian areas, and that the environmental impact statement (“EIS”) assessing the Project’s environmental consequences was not adequate under the National Environmental Policy Act (“NEPA”).

The District Court ruled in favor of the Defendants. The Plaintiffs appealed this decision to the 10th Circuit Court of Appeals. The Court of Appeals determined that the Plaintiffs’ claims were not ripe, that the Project was inconsistent with the Forest’s plan and guidelines, and that Plaintiffs’ NEPA claims were rejected on the merits.

Citizens for Pennsylvania’s Future v. Ultra Resources, Inc., No. 4:11-cv-01360-RDM (M.D. Pa. July 21, 2011)

Citizens for Pennsylvania’s Future (“Plaintiff”) seeks declaratory and injunctive relief from Ultra Resources, Inc.’s (“Defendant”) alleged violations of the Clean Air Act (“CAA”) (42 U,.S.C. § 7604(a)(3)), Pennsylvania’s Implementation Plan (“SIP”), and Pennsylvania’s New Source Review Regulations, 25 Pa. Code Chapter 127, Subchapter E. Plaintiff alleges that since 2008 the Defendant has operated an extensive network of natural gas wells, pipelines, compressor stations, and associated equipment without obtaining all the necessary permits and without achieving the lowest achievable emissions rate as required by Pennsylvania’s regulations. Plaintiff claims that the environment has been and is being damaged by large amounts of nitrogen oxides and related pollution that create fine particulate matter in the atmosphere.

Arguing that it obtained all the appropriate permits from the Pennsylvania Department of Environmental Protection, the Defendant has filed a motion to dismiss for lack of jurisdiction, asserting that the Plaintiff’s claims should be heard by the Pennsylvania Environmental Hearing Board. The Pennsylvania Department of Environmental Protection has filed an amicus curiae brief in support of the Defendant’s motion. The motion to dismiss was denied on September 24, 2012.

125 Other defendants are Rick Cables, in his official capacity as Regional Forester of the Rocky Mountain Region of the United States Forest Service; United States Forest Service; Thomas Vilsack, in his official capacity as Secretary of the Department of Agriculture; United States Bureau of Land Management; and Kenneth Salazar, in his official capacity as Secretary of the Department of Interior.

87

A Case Management Order set a fact discovery deadline of November 30, 2013. Dispositive motions are to be filed by February 28, 2014. Plaintiff must designate experts by March 14, 2014, with Defendant’s designation due by April 15, 2014.

On February 28, 2014, Ultra Resources filed a motion for summary judgment based on it having obtained “all necessary air permit approvals for its compressor stations…and [that it] did not construct a major source of NOx emissions.”

The Ozark Society v. United States Forest Service; Judith Henry, Supervisor of the Ozark-St. Francis National Forest; the Bureau of Land Management; John Lyon, Eastern States Director, Bureau of Land Management; and Bruce Dawson, Eastern States Field Manager, Bureau of Land Management; No. 4:11-cv-00782 (E.D. Ark., October 31, 2011)

The Ozark Society (“Plaintiff”), a non-profit corporation with over 850 dues-paying members, describes its mission as conservation, education, and recreation. In the complaint, the Plaintiff states that its members utilize the Ozark National Forest’s wilderness areas and wild and scenic rivers for hiking, boating, and other outdoor activities. The Plaintiff asserts that the United States Forest Service, the Bureau of Land Management, and their directors and managers (“collectively “Defendants”) failed to comply with the National Environmental Policy Act (“NEPA”) and other federal environmental and procedural statutes in approving gas leases for exploration and development in the Ozark National Forest. More than 60 gas wells have been drilled in the forests, with many more anticipated, creating a number of environmental impacts including the construction of roads, increased traffic, storage of drilling fluids, noise, venting gas, storm water runoff, and increased water usage for hydraulic fracturing use.

The Plaintiff sought an injunction stopping all natural gas exploration and development in the Ozark-St. Francis National Forests. On March 1, 2012, the Court heard arguments on the preliminary injunction. In denying the injunction on March 23, 2012, the Court found that the Plaintiff failed to establish that it is likely to succeed on the merits or that it likely will suffer irreparable harm absent preliminary relief.

On November 2, 2012, this case was re-assigned to the Court handling the Ouachita Watch League lawsuit, supra. See Ouachita Watch League lawsuit, supra for current status.

Center for Biological Diversity and Sierra Club v. The Bureau of Land Management and Ken Salazar, Secretary of the Department of the Interior, No. 5:11-cv-06174 (N.D. Cal., December 8, 2011)

The Center for Biological Diversity and the Sierra Club (“Plaintiffs”) filed this lawsuit to overturn the Bureau of Land Management’s “illegal and unwise lease sale” to allow oil and gas development on sensitive California lands without analyzing the full environmental effects of

88

such development. The Plaintiffs claim violations of the National Environmental Policy Act (“NEPA”) and the Mineral Leasing Act of 1920 (“MLA”).

NEPA requires the preparation of an environmental impact statement (“EIS”) to consider the effects of each activity on the properties while the MLA requires the lessee to conduct its operations using all reasonable precautions to prevent waste of oil or gas developed in the land. Expressing concern about endangered species living in the area (San Joaquin kit fox, blunt-nosed leopard lizard, steelhead trout, and the California condor), the “highly controversial and dangerous drilling method” of hydraulic fracturing, and the impacts of oil spills, habitat contamination, and methane leaks, the Plaintiffs argue in their motion for summary judgment that the Bureau of Land Management (“BLM”) failed to consider and fully analyze the impacts of oil and gas development on the area in its environmental assessment (“EA”) and in its finding of no significant impact.. Plaintiffs want the leases set aside. BLM countered in a cross-motion for summary judgment that it was premature to evaluate the impacts at this stage, that the impacts must be evaluated in the site-specific assessments conducted in relation to applications for permits to drill.

On March 31, 2013, U.S. Magistrate Judge Paul S. Grewal ruled that the BLM violated NEPA by leasing land for oil and gas extraction without assessing the risks posed by hydraulic fracturing. He stated that NEPA required federal agencies to conduct the impact review at the earliest possible time to allow for proper consideration of environmental values. The BLM unreasonably relied on an earlier single-well development scenario and failed to take into account all reasonably foreseeable effects of its actions in categorically refusing to consider the effects of hydraulic fracturing. The BLM could not shirk its NEPA responsibilities by labeling discussion of hydraulic fracturing as a “crystal ball” inquiry. Therefore, Magistrate Judge Grewal ruled that the BLM failed to conduct the “hard look” analysis required by NEPA by dismissing any development scenario involving hydraulic fracturing when used in combination with technologies such as horizontal drilling. The EA and the finding of no significant impact were found to be erroneous as a matter of law.

The Court ordered the parties to meet and confer and submit to the court an appropriate judgment on remedy issues. On September 16, 2013, the parties advised the Court that they had reached a tentative resolution. The parties are working to finalize the settlement and are to report back to the Court on January 17, 2014.

89

Powder River Basin Resource Council, Wyoming Outdoor Council, and National Wildlife Federation v. U.S. Bureau of Land Management, Kenneth Salazar in his official capacity as Secretary of the Interior, Mike Pool in his official capacity as Acting Director of the Bureau of Land Management, Donald Simpson in his official capacity as Wyoming State Director of the Bureau of Land Management, and Duane Spencer in his official capacity as the Buffalo Field Office Manager of the Bureau of Land Management, Case No. 1:12-cv-00996 (D.C. June 19, 2012)

Environmentalists have sued the U.S. Bureau of Land Management (and affiliated government officials) (BLM) over the approval of a resource management plan that they claim will endanger elk and other wildlife in Wyoming’s Powder River Basin area which contains more than 100,000 acres of remote and steep terrain called the Fortification Creek Planning Area. They request the court to void and suspend all approved and future natural gas drilling activities in the Powder River Basin area until there is compliance with the National Energy Protection Act (NEPA).

According to the complaint for declaratory and injunctive relief, the BLM failed to “take a hard look at direct, indirect, and cumulative impacts to the environment” of its oil and gas development plan; failed to prepare an Environmental Impact Statement (EIS) or to justify its decision to forego an EIS; failed to provide a reasonable basis for comparatively analyzing and choosing between alternatives; and failed to comply with its duty to take a hard look at potentially significant new circumstances and information and to prepare a supplemental NEPA analysis. The State of Wyoming and Lance Oil & Gas Company (who holds federal leases) have intervened in the lawsuit.

On March 28, 2014, the court ruled on the parties’ cross-motions for summary judgment. The court determined that the BLM had complied with NEPA, had acted reasonably in its evaluations and methodology, and adequately analyzed the impacts on water resources. The court closed the case on March 31, 2014.

Sierra Club, et al. v. The Village of Painted Post, et al., Index No. 2012-0810CV, In the State of New York, Supreme Court, County of Steuben (June 25, 2012)

The Sierra Club. People for a Healthy Environment, Inc., Coalition to Protect New York, and several residents of Painted Post and other surrounding towns (“Plaintiffs”) filed suit to prevent the transportation of water from the municipal water system to gas drilling sites in Pennsylvania “until such time as Respondents shall have fully complied with the New York State Environmental Quality Review Act, Environmental Conservation Law,” the New York State Water Supply Law, and other state and federal statutes. The Plaintiffs complain that the Village “failed to consider even one of the significant adverse environmental impacts of water transports from the proposed water loading facility” and that the Village failed to adequately prepare the Environmental Assessment Form required to be filed with the State by not identifying potential

90

significant adverse environmental consequences, including the significant increase in truck traffic, noise, and depletion of water supplies.

The Village signed a five-year agreement with a Shell subsidiary, allowing the company to withdraw over 1 million gallons of water per day from a local aquifer. In return, the Village would make a minimum of $3.2 million. The water shipping stopped in September 2012 due to a slowdown in drilling/fracking operations in Pennsylvania.

A hearing on the injunction request was held on March 1, 2013. On March 25, 2013, the Judge issued his decision, voiding the agreement and enjoining any further shipments because the Village had not done the required environmental review under the State Environmental Quality Review Act. This decision is on appeal (Case No. 13-01558) to the state’s Supreme Court’s Appellate Division, Fourth Department in Rochester, New York, with an oral argument scheduled for February 24, 2014.

Center for Biological Diversity, Earthworks, Environmental Working Group, and Sierra Club v. California Department of Conservation, Division of Oil, Gas, and Geothermal Resources, and DOES I through X, Case No. RG12652054, In the Superior Court for the State of California for the City and County of Alameda (October 16, 2012)

The Plaintiffs who are several well-known environmental groups want a declaratory judgment and an injunction prohibiting any new oil and gas permit approvals until the California Department of Conservation, Division of Oil, Gas, and Geothermal Resources (“DOGGR”) “complies with its legal requirements to evaluate and mitigate the significant environmental and public health impacts caused by hydraulic fracturing.” The Plaintiffs claim that the DOGGR has issued permits “without any environmental analysis” of “contamination of domestic and agricultural water supplies, the use of massive amounts of water, the emission of hazardous air pollutants, and the potential for induced seismic activity” allegedly created by hydraulic fracturing.

Western States Petroleum Association (“WSPA”), the California Independent Petroleum Association, and the Independent Oil Producers Agency have intervened as defendants in the lawsuit.

On October 21, 2013, WSPA filed a motion to dismiss citing the provisions of California’s new hydraulic fracturing law (S.B. 4).126 WSPA argues that the complaint is now irrelevant because the law requires the DOGGR “to conduct an EIR [environmental impact report] addressing any potential environmental impacts from hydraulic fracturing in the state” by July 15, 2015. According to WSPA, the law releases oil and gas companies from any need to go through California Environmental Quality Act (CEQA) until the EIR is completed. The DOGGR has

126 See http://legiscan.com/CA/bill/SB4/2013.

91

filed pleadings concurring with WSPA, stating that “the regulatory framework adopted in S.B. 4, including new provisions for well stimulation permits and for environmental review, render plaintiff’s claims regarding the Department’s alleged past pattern and practices for environmental review of hydraulic fracturing moot.”

At a hearing on January 13, 2014, the Superior Court judge dismissed the lawsuit, giving the “regulations substantial deference.” The judge stated that “S.B. 4 directs how the DOGGR must proceed regarding its environmental review of applications for hydraulic fracking, and that S.B. 4 is a comprehensive legislative solution that moots the claims in this case” by giving the DOGGR “clear directions to study fracking and to have regulations in place by 1/1/15.” Any “challenge to DOGGR’s policy or practice after 1/1/15 is not ripe for judicial review because the DOGGR has not yet completed its regulations.”

Center for Biological Diversity and Sierra Club v. The Bureau of Land Management and Sally Jewell, Secretary of the Department of the Interior, No. 5:13-cv-01749 (N.D. Cal., April 18, 2013)

The Center for Biological Diversity and the Sierra Club have sued the Bureau of Land Management (“BLM”), claiming that the BLM violated the National Environmental Policy Act (NEPA) by leasing nearly 18,000 acres for oil and gas development without assessing the risks posed by hydraulic fracturing. As in Case No. 5:11-cv-06174, Center for Biological Diversity v. The Bureau of Land Management, supra., the groups assert that a detailed environmental impact study (EIS) was needed to investigate how potential hydraulic fracturing could affect the local groundwater and endangered species living in the area. They allege that the BLM unreasonably and arbitrarily relied on an environmental assessment that only looked at the environmental impact of a single well on one acre of land, even though the lease covered almost 18,000 acres.

As a related case, this lawsuit was reassigned to the U.S. Magistrate Judge handling Case No. 5:11-cv-06174, Center for Biological Diversity v. The Bureau of Land Management, supra. On September 16, 2013, the parties advised the Court that they had reached a tentative resolution and were initiating the approval process. The parties continue to pursue authorization and are to report back to the court on May 2, 2014.

Hughes, et al. v. Department of Environmental Quality, Case No. 312902 (State of Michigan Court of Appeals, February 11, 2014)

Several Michigan citizens and the group Ban Michigan Fracking questioned the Department of Environmental Quality (DEQ) about its definition of “injection well” in Mich. Admin. Code , R. 324.102(x), urging that the definition should include wells completed with hydraulic fracturing (“frack wells”).

92

The DEQ responded by stating that “a frack well is not an injection well under Rule 324.102(x) because a frack well injects fluids for the ‘initial stimulation’ of oil and gas, whereas Rule 324.102(x) limits injection wells to wells that are used for disposal, storage, or secondary recovery of oil and gas.”

The citizens and Ban Michigan Fracking then filed a declaratory judgment action, requesting that the definition of injection well include a frack well, thus making the regulations relating to injection wells applicable to frack wells.

On February 11, 2014, the Michigan Court of Appeals sided with the DEQ, stating that under the plain language of the rule, an “injection well is either a well used to dispose of…waste fluids or a well used to inject…fluids for the purpose of increasing the ultimate recovery of hydrocarbons from a reservoir or for the storage of hydrocarbons.” According to the court, for a well to be categorized as an “injection well,” it must be used for the purposes of recovering hydrocarbons before and after the injection of fluid.

The court continued: “…it is undisputed that the frack wells at issue are not used for the purpose of recovering hydrocarbons before the injection of fluid… [B]ecause a newly constructed frack well does not involve the continuing recovery of hydrocarbons, but rather the initial recovery of hydrocarbons when such recovery was nonexistent, the wells at issue here to not fall within the scope of the unambiguous language of Rule 324.102(x).

On March 3, 2014, a motion for reconsideration was filed, asking the court to resolve a separate part of the appeal which the opinion overlooked. The appellants indicate that the court’s opinion did not adjudicate the “contention that a frack well is used to dispose of waste fluids.”

WildEarth Guardians v. Unites States Forest Service, United States Bureau of Land Management, et al., Case No. 2:14-cv-00349, (D. Utah, May 7, 2014)

On May 7, 2014, WildEarth Guardians filed a complaint in the U.S. District Court, District of Utah, Central Division, against the U.S. Forest Service and the U.S. Bureau of Land Management, seeking to enjoin these agencies from approving oil and gas drilling in the Ashley National Forest, located in the Uinta Basin.

In a Record of Decision (ROD) based on a Final Environment Impact Statement (FEIS) and other documents, the Forest Service approved a 400-well project on February 12, 2012. This 400-well project on 162 well pads is being developed on 25,900 acres in the Ashley National Forest and will require the surface disturbance of 836 acres, 57 miles of new roads, 493 stripped acres for well pads, four four-acre compressor stations, and 87 miles of natural gas pipeline.

WildEarth Guardians argue that the Forest Service and the Bureau of Land Management “failed in their legal obligations to take a hard look at the impacts of the 400-well Project on sage grouse

93

[considered to be a threatened and endangered species], roadless areas and air and water quality and,…to prevent and mitigate the adverse consequences the project will have on these natural resource values.” The agencies also failed to examine alternative actions that would allow development while still protecting sage grouse and roadless areas and while moving toward compliance with air and water quality standards.

Litigation Involving Conflict Between Mineral Owners

Allegheny Enterprises, Inc. v. Cohort Energy Company and J-W Operating Company, Case No. 4:10-cv-02539 (M.D. Pennsylvania, Dec. 15, 2010)

Allegheny Enterprises, Inc. (“Allegheny”) owns the coal, shallow gas and oil and related rights under certain properties. In March 2008, Allegheny partially assigned its interest in the oil and gas 4,000 feet below the surface to Cohort Energy Company, who in turn contracted with J-W Operating Company (“J-W Operating”) to develop the resources.

On February 17, 2010, Allegheny filed the necessary paperwork with the Pennsylvania Department of Environmental Protection (“DEP”) to evidence its intent to develop and mine the coal located under a portion of the properties. On June 18, 2010, J-W Operating filed the necessary paperwork with the DEP to begin drilling on the properties. In its lawsuit filed in late 2010, Allegheny alleges that the location of J-W Operating’s well will make it impossible for Allegheny to extract the coal valued at $941,570.

On March 5, 2014, the court ruled on the parties’ motions for summary judgment, ordering J-W Operating to pay for the damages it caused when drilling through the site of a proposed Allegheny coal mine in an attempt to access a deep deposit of natural gas in a strata it had purchased the rights to. The court based this decision on its prediction “that the Pennsylvania Supreme Court would hold that an oil and gas lessee must compensate the owner of an above- located coal estate for otherwise useful coal rendered inaccessible by oil and gas drilling.” Imposing liability on an oil and gas driller was seen as “beneficial from a public policy point of view.” “If there is a tradeoff between using a given plot of land for producing coal on the one hand and oil and gas on the other, the Court should encourage efficient use of the land.”

This case is scheduled for trial in November 2014.

Litigation Involving Enforcement

In Re U.S. Energy Development Corp., File No. 11-57 (New York Department of Environmental Conservation, filed Jan. 24, 2012)

U.S. Energy Development Corporation (“EDC”) is a privately owned oil and natural gas exploration and development company with oil and gas drilling operations in McKean County, Pennsylvania and in a watershed that contains Yeager Brook which flows into New York. The

94

New York Department of Environmental Conservation (“NYDEC)” filed a complaint against EDC, seeking an order requiring EDC to pay $187,500 for water quality violations associated with fracking activities. These violations include contamination problems associated with poor storm water controls around the roads used to access the wells. NYDEC seeks the maximum penalty because of EDP’s failure to comply with two previous consent orders from August and November 2010.

EDP filed a motion to dismiss the complaint, arguing that there was no subject matter jurisdiction because the Clean Water Act preempted the application of New York law to an out- of-state source of water pollution. On August 23, 2013, the Administrative Law Judge denied EDP’s motion and also dismissed many of EDP’s affirmative defenses, pointing to the fact that EDP made the business decision to settle with the NYDEC despite knowing of the federal preemption defense. Therefore, the Judge concluded that EDP voluntarily consented to New York’s standards to resolve the claims.

Litigation Challenging Government Regulations

Independent Petroleum Association of America and U.S. Oil & Gas Association v. United States Environmental Protection Agency, No. 10-1233 (D.C. Aug. 12, 2010)

The Independent Petroleum Association of America and U.S. Oil & Gas Association (“Plaintiffs”) filed this lawsuit against the U.S. Environmental Protection Agency (“EPA”), seeking review of a statement made on the EPA’s website that any service company performing hydraulic fracturing using diesel fuel must receive prior authorization from the Underground Injection Control (“UIC”) program and that injection wells using diesel fuel as a hydraulic fracturing additive are Class II wells under the UIC program.

The parties settled on February 23, 2012, when the EPA agreed to modify its on-line statement to read that “[a]ny service company that performs hydraulic fracturing using diesel fuel must receive prior authorization through a permit under the applicable UIC program. For more information on how the UIC regulations apply to hydraulic fracturing using diesel fuels, please see EPA’s Guidance issued for public comment…” It was agreed that another paragraph on the website would read: “State oil and gas agencies may have additional regulations for hydraulic fracturing. In addition, states or EPA have authority under the Clean Water Act to regulate discharge of produced waters from hydraulic fracturing operations.” This lawsuit was voluntarily dismissed on May 10, 2012.

Coalition for Responsible Growth and Resource Conservation, et al v. Federal Energy Regulatory Commission, No. 12-566 (2nd Cir., Feb. 28, 2012)

The Coalition for Responsible Growth and Resource Conservation, Damascus Citizens for Sustainability, and the Sierra Club (“Plaintiffs”) sought to overturn the Federal Energy

95

Regulatory Commission’s (“FERC”) approval of Central New York Oil and Gas Company LLC’s proposal to construct and operate a 39 mile long pipeline with related facilities, including compressors, to transport gas from Pennsylvania’s Marcellus Shale formation. Plaintiffs asserted that FERC did not properly consider the environmental impact and ecological damage that the pipeline would have on the areas where the pipeline would be constructed and operated.127

Plaintiffs petitioned the Second Circuit Court of Appeals to review FERC’s order and to stay any pipeline construction pending a hearing. The Second Circuit denied the request for a stay but agreed to an expedited briefing and argument schedule for the Plaintiffs’ petition for review. On June 12, 2012, the Second Circuit denied the petition for review, stating that FERC’s 296-page environmental assessment thoroughly considered the issues and that FERC reasonably concluded that the cumulative impacts of development in the Marcellus Shale region were not sufficiently causally related to the project to warrant a more in-depth analysis.

Litigation Challenging Disclosure Regulations

Powder River Basin Resource Council, Wyoming Outdoor Council, Earthworks, and OMB Watch v. Wyoming Oil and Gas Conservation Commission, Case No. 94650, In the Seventh Judicial District Court of the State of Wyoming, in and for the County of Natrona; March 22, 2012

The four environmental group Plaintiffs in this lawsuit assert that the Wyoming Oil and Gas Conservation Commission has unlawfully withheld the identification of hydraulic fracturing chemicals used by various oil and gas producers, including Baker Hughes, BJ Services Company, CESI Chemical, Champion Technologies, Core Laboratories, Halliburton Energy Services, Inc., NALCO Company, SNF, Inc., and Weatherford International, under the trade secret exception of its disclosure rules. Plaintiffs complain that the oil and gas producers did not provide sufficient factual support to uphold their claim of trade secret and want all the chemicals publicly disclosed. Halliburton Energy Services, Inc., who intervened in this litigation, warned that uncovering the hydraulic fracturing formula could hamstring project development efforts in the state.

On March 21, 2013, the Court ruled that the Commissioner “acted reasonably when he established a policy for evaluating trade secret requests and that policy is in accordance with the Wyoming Public Records Act”128 and that the Plaintiffs failed to demonstrate that the

127 The Pennsylvania Game Commissioner has described the area through which the pipeline would be built as undisturbed forest habitat “where the abundance and species richness of various area-sensitive forest bird species are among the highest in the state.” 128 Wyoming’s hydraulic fracturing disclosure rules require owners, operators or service companies to disclose to the Commission the chemical additives, compounds and concentrations or rates proposed to be mixed and injected. Wyo. Oil & Gas Comm’n Ch. 3, § 45 (d)-(f). The required information includes additive type, compound name and Chemical Abstract Service (CAS) numbers, and proposed rate or concentration for each additive. The Commission retains discretion to request the formulary disclosure for the chemical compounds. However, this formulary

96

Commissioner’s “decisions to grant trade secret protection requests were arbitrary, capricious, or not in accordance with the law.” The Commission’s decision to withhold the hydraulic fracturing formula information was upheld by the Court. In its conclusion, the Court expressed its awareness of the “important issues of public policy” implicated in the parties’ positions. The Plaintiffs’ position that the “identity of hydraulic fracturing chemicals is key to understanding the potential environmental and health impacts of hydraulic fracturing” and the Defendant’s position that hydraulic fracturing has a positive economic impact on Wyoming and that disclosure would adversely affect the industry have “substantial merit, however the Court feels these competing concerns are best addressed through legislative action, or further rule promulgation and are not properly within the Court’s purview.”

On March 12, 2014, the Wyoming Supreme Court reversed and remanded the lawsuit for further proceedings, pointing to a “procedural flaw” and stating that “[b]ecause the district court reviewed the Commission Supervisor’s decision under the [Wyoming Administrative Procedure Act], we must reverse and remand.” The Supreme Court found that, in their prayer for relief, the environmental groups “asked the district court to compel the Supervisor to show cause why its partial denial of their request for access to its records was lawful. However, no order to show cause [under the Wyoming Public Records Act (WPRA)] was ever issued, and…the district court never held a show-cause evidentiary hearing.” The Supreme Court directed the district court to determine whether it will allow the environmental groups “to amend their existing pleadings to request and issue an order to the Supervisor to show cause as to why the documents requested should not be produced, or dismiss the case, which will permit Appellants to file a new action.”

“[U]nwilling to cast the district court adrift without some guidance on the standard to be applied…” and adopting the Freedom of Information Act standard, the Wyoming Supreme Court defined a trade secret under the WPRA as “a secret, commercially valuable plan, formula, process, or device that is used for the making, preparing, compounding, or processing of trade commodities and that can be said to be the end product of either innovation or substantial effort, with a direct relationship between the trade secret and the productive process.” The district court is required to determine as a matter of fact based on evidence presented to it whether the information sought is a trade secret. The district court will have to “review the disputed information on a case-by-case, record-by-record, or perhaps even on an operator-by-operator basis, applying the definition of trade secrets…and making the particularized findings which independently explain the basis of its ruling for each.”

information only needs to be disclosed to the Commission and confidentiality protection shall be provided for trade secrets. Before granting trade secret exemptions, the Commission requires the party seeking the exemption to submit details of the chemicals whose identities they want to withhold, along with a cover letter justifying their trade secret position. The Commission staff then reviews the chemical information and the justification to ensure compliance with the disclosure rule and the Wyoming Public Records Act. If there is compliance, the Commission withholds the information.

97

Dr. Alfonso Rodriguez v. Michael L. Krancer, in his official capacity as Secretary of the Pennsylvania Department of Environmental Protection; Robert F. Powelson, in his official capacity as Chairman of the Public Utility Commission; and Linda L. Kelly, in her official capacity as Attorney General of the Commonwealth of Pennsylvania, Case No. 3:12-cv-01458, (M.D. Pa. July 27, 2012

On February 14, 2012, the Pennsylvania Governor signed into law Act 13 of 2012 which regulates the disclosure of hydraulic fracturing chemical components. Section 3222.1(b)(10) of the Act requires that companies engaged in hydraulic fracturing disclose information regarding chemicals used in the process to medical providers contingent on the medical provider agreeing to keep certain proprietary information confidential.

A vendor, service company or operator shall identify the specific identity and amount of any chemicals claimed to be a trade secret or confidential proprietary information to any health professional who requests the information in writing if the health professional executes a confidentiality agreement and provides a written statement of need for the information indicating all of the following: (i) the information is needed for the purpose of diagnosis or treatment of an individual; (ii) the individual being diagnosed or treated may have been exposed to a hazardous chemical; and (iii) knowledge of information will assist in the diagnosis or treatment of an individual.

Section 3222.1(b)(11) imposes similar disclosure requirements on the oil and gas industry in emergency situations contingent on oral representations of the medical provider where it is not feasible to obtain immediate written agreement to Act 13’s confidentiality provisions.

In his lawsuit, Dr. Alfonso Rodriguez (“Plaintiff”), a licensed medical physician “who has treated patients that have been exposed to toxic fluids and/or environmental contamination caused by oil and gas operations,” complained that the “medical gag” provisions of Pennsylvania’s Act 13 of 2012 improperly restricts his First Amendment freedom of speech rights. He argued that the “practice of medicine requires a free and open exchange of questions, answers and information between” the doctor and the patient, medical community, researchers and insurance companies, among others. Plaintiff sought an injunction from requiring him to sign any confidentiality agreement.

On October 23, 2013, the court granted Defendants’ motions to dismiss, ruling that Plaintiff lacked standing because his “alleged injury…is too conjectural to satisfy the injury in fact requirement of [U.S. Constitution] Article III standing.” “Plaintiff has not alleged that he has been in a position where he was required to agree to any sort of confidentiality agreement under the act. Therefore…he has not yet…been prevented from engaging in any sort of communication as a result of the act. Similarly, plaintiff has failed to indicate that he has been forced to waive any of his fundamental constitutional rights.”

98

Litigation Involving Antitrust Issues

Cherry Canyon Resources, L.P. v. Halliburton Company, et al., Case No. 2:13-cv-00238, In the U.S. District Court for the Southern District of Texas, Corpus Christi Division

On July 31, 2013, Cherry Canyon Resources, L.P. filed a federal class action lawsuit against Halliburton Co., Schlumberger Ltd., and Baker Hughes, Inc., claiming that these companies conspired to raise prices for hydraulic fracturing services and limit competition in the market for fracking pressure pumping services. According to the complaint, Cherry Canyon purchased pressure pumping services from one or more of the defendants who control approximately 60% of the North American market of fracking services. Cherry Canyon alleges that in 2011, after many new, small competitors entered the industry and threatened to drive down prices, these "Defendants colluded to restrict and manipulate supply in order to increase prices and market share toward their pre-entry 'boom year' levels.," referring to the period before competitors entered the market. "They succeeded." Cherry Canyon believes that these companies participated in "meetings, conversations and communications" where they agreed on prices and output, and later held similar meetings to enforce the illegal agreements.

This complaint was filed in the wake of confirmation by the Department of Justice that in May, Baker Hughes and Halliburton received civil investigative demands concerning an antitrust investigation regarding their pressure pumping services.

On October 15, 2013, the court signed a final judgment, dismissing the lawsuit without prejudice on the motion for voluntary dismissal filed by Cherry Canyon.

Litigation Between Operator and Service Company

Cabot Oil & Gas Corp. v. Casedhole Solutions Inc., et al., Cause No. 2014-14786, In 127th Judicial District Court of Harris County, Texas, March 19, 2014

On March 19, 2014, Cabot Oil & Gas Corporation (“Cabot”) sued two oil and gas field service companies, alleging that they perforated the casing of a Pennsylvania gas well about 7,000 feet higher than what Cabot had ordered and concealed the discrepancy. Cabot contracted with Casedhole Solutions Inc. and Superior Well Services, Inc. (“Superior”) to perforate a well in Susquehanna County, Pa., at three measured depths between 11,500 and 11,700 feet. Instead the service companies perforated the well at measured depths between 4,000 and 4,500 feet while advising Cabot that they had followed instructions.

Perforation of the production casing and the cement surrounding it was necessary to allow the flow of hydrocarbons from the well’s targeted formation to the production casing in order to produce gas.

99

When Superior began hydraulic fracturing of the well, low fracture pressures indicated that the well might not have been perforated at the specified depths and that the fracturing fluid might have migrated into the wrong underground formation, requiring the well to be re-developed.

Cabot seeks damages for delay in completion and production of the well and for the costs of remediation. Cabot brings claims of breach of contract, negligence, gross negligence, negligent misrepresentation, and fraud.

Transport of Shale Oil by Rail

With the volume of produced oil rising faster than can be moved by pipeline, companies have turned to alternate methods of transporting oil products to processing facilities. Oil and gas companies are using railroads and semi-trucks more and more to transport crude oil and drilling waste by-products away from the well site as well as to bring in chemicals, fluids, and other materials needed to drill and develop the resource.

Unsurprisingly, this increased volume has led to an increase in the number of oil-related accidents. Since April of 2013, there have been train derailments in western Minnesota, Baltimore, Pennsylvania, North Dakota,129 Alabama,130 and at three sites in Canada: Lac- Mégantic,131 Gainfield,132 and Landis.133 And in the Lac- Mégantic crash, inspectors determined that the oil the train carried was more explosive than labeled.134

129 On December 30, 2013, there was a derailment of 21 tank cars in Casselton, North Dakota resulting in an explosion which required the evacuation of 1,400 people. 130 On November 8, 2013, there was a derailment of more than 20 cars in a 90-car petroleum crude oil train near Aliceville, Alabama. 131 In the early hours of July 6, 2013, a train carrying crude oil derailed in Lac-Mégantic, Quebec. The train, an unattended 72-car freight train, wrecked in the center of the small town, rupturing many of the tanker cars that were being hauled and creating a fire approximately 400 feet in diameter. Forty-seven people died in the explosion and fire. See http://www.theatlantic.com/infocus/2013/07/freight-train-derails-and-explodes-in-lac-megantic- quebec/100548/. 132 On October 19, 2013, 13 cars (9 carrying liquefied petroleum gas and 4 carrying crude) derailed in the accident in Gainford, Alberta, which happened at around 1 a.m. One rail car carrying liquefied petroleum gas exploded and three others caught fire. There were no injuries, but local authorities evacuated the area as a precaution. See http://www.reuters.com/article/2013/10/19/us-cnrailway-derailment-idUSBRE99I04820131019. 133 Seventeen cars derailed, one of which leaked lube oil. See http://www.reuters.com/article/2013/10/19/us- cnrailway-derailment-idUSBRE99I04820131019. 134 See “Safety Alert Relating to Flammability of North Dakota Bakken Crude Oil Transported by Rail” at http://fracking.nortonrosefulbright.com/2014/01/SafetyAlertRelatingToFlammabilityOfNorthDakotaBakkenCrudeO ilTransportedByRail.html, and “Emergency Order Requires Testing and Classification of Crude Oil Transported by Rail, available at http://fracking.nortonrosefulbright.com/2014/02/EmergencyOrderRequiresTestingAndClassificationOfCrudeOilTra nsportedByRail.html.

100

In re: Montreal Maine & Atlantic Railroad Ltd., Case No. 1:13-mc-00194, In the U.S. District Court in Maine; In re: Montreal Maine & Atlantic Railroad Ltd., Case No. 1:13-bk- 10670, In the U.S. Bankruptcy Court for the District of Maine

Nineteen wrongful death lawsuits135 from the July 2013 train derailment and explosion in Lac- Mégantic, Quebec, Canada were transferred from U.S. District Court in Illinois to the U.S. District Court in Maine (In re: Montreal Maine & Atlantic Railroad Ltd., Case No. 1:13-mc- 00194) on March 21, 2014. The Maine federal judge ordering the transfer found that these lawsuits were “related to” the Maine bankruptcy proceedings filed by Montreal Maine and Atlantic Railroad Ltd. (MMAR) in Maine (Bankruptcy Case No. 1:13-bk-10670, U.S. Bankruptcy Court for the District of Maine) one month after the accident. Presented with evidence of shared insurance between MMAR and some of the wrongful death defendants, the Court made the “limited finding that claims against certain of the defendants named therein are related to the Railway’s bankruptcy.”

Communities for A Better Environment, Asian Pacific Environmental Network, Sierra Club, and Natural Resources Defense Council v. Bay Area Air Quality Management District, Case No. ______, In the Superior Court of the State of California, County of San Francisco

On March 27, 2014, Earthjustice, on behalf of several environmental and conservation groups, filed a lawsuit against the Bay Area Air Quality Management LLC (BAAQM) for issuing a permit allowing North Dakotan Bakken crude oil to be transported to refineries in the San Francisco Bay area, The environmentalists argue that the BAAQM issued the permit without any notice or public process, without considering the “well-known and potentially catastrophic risk to public health and safety” as evidenced in the Lac-Mégantic, Québec train derailment in July 2013, and without complying with the requirements of the California Environmental Quality Act (CEQA).

The environmentalists contend that, in labeling the permit request as “ministerial,” the BAAQM ignored “the risks of derailment and accidents, risks of explosions, increased release of toxic air pollutants, increased greenhouse gases from further train travel, and increased noxious odors.” The groups assert that these impacts from the issuance of the permit should have been publicly disclosed, analyzed and mitigated in an Environmental Impact Review (EIR). They point to the already-heavily polluted community where the rail yard is located and to California’s inadequate and aged railroad infrastructure.

The environmental groups seek a declaratory judgment and preliminary injunction to set aside the permit, to require full compliance with the CEQA , and to enjoin crude-by rail operations under the permit until an EIR is complete and subject to public scrutiny.

135 For identification of the nineteen wrongful death lawsuits, see footnote no. 1 in the Order of the U.S. District Court of Maine dated March 21, 2014 in Case No. 1:13-mc-00184 [docket no. 100].

101

Settlements Involving Hydraulic Fracturing and Shale Drilling

Settlement with Oil and Gas Corporation (related to Fiorentino case)

A settlement related to the Fiorentino matter was reported on December 16, 2010, when the Pennsylvania Department of Environmental Protection (“PDEP”) announced a resolution of its action against Cabot Oil and Gas Corporation. The action by PDEP was related to claims that 19 resident families’ water wells were allegedly affected by methane contamination as a result of nearby drilling activities. The families collectively were entitled to receive $4.1 million in compensation and other concessions, and a $500,000 penalty was to be paid to the PDEP. The settlement allows Cabot to continue its hydraulic fracturing operations, and the families were allowed to maintain their individual tort claims against the company, which allege claims for health and property damage.136

Settlement with Chesapeake Energy Corporation (related to Armstrong case)

Similarly, on May 17, 2011, the PDEP and Chesapeake Energy Corporation reached a settlement agreement relating to complaints of water contamination from the Armstrong plaintiffs137 and others.138 A joint review between Chesapeake and the PDEP to study possible natural gas drilling violations produced inconclusive results. Under the settlement, Chesapeake agreed to pay a $900,000 penalty for alleged contamination of the water supply and an additional $188,000 for violations regarding unrelated tank fires. Chesapeake may continue operations and drilling subject to obtaining approval from the PDEP for a condensate management plan for each well site.

Brockway Borough Municipal Authority Settlement

In another unique action, the Brockway Borough Municipal Authority (“Brockway”) sued Flatiron Development Force, Inc. and New Growth Resources (collectively, “Defendants”) in November 2010 in Pennsylvania State Court. Brockway owns reservoirs, groundwater wells, and surface rights in the watershed area for the purpose of providing drinking water to the Borough. The Defendants own the mineral rights and planned to clear timber from 23 acres in preparation for drilling activities. The Defendants also planned to construct a 10 million gallon impoundment to store resultant wastewater. Brockway requested an injunction against further

136 See Fiorentino v. Cabot Oil, supra. See also Greenwire: Pennsylvania, Cabot reach settlement over methane contamination (Dec. 16, 2010), available at http://www.eenews.net/Greenwire/2010/12/16/20/ (last visited Apr. 14, 2011). 137 See Armstrong v. Chesapeake Appalachia, LLC, et al., supra. 138 See Chesapeake Settles Pa. Water Pollution Claims for $1M (May 17, 2011, available at http://www.law360.com/energy/articles/245667?utm_source=newsletter&utm_medium=email&utm_campaign- energy (last visited June 3, 2011).

102

site preparation or drilling, claiming that the Defendants did not have a proper easement for the drilling activities and that the activities constituted a public nuisance.139

After winning a temporary injunction, Brockway settled the case. The terms of settlement require the Defendants to provide drinking water to the Borough’s residents within 24 hours if drilling activities pollute ground or surface waters. If groundwater is polluted, the Defendants must drill a new water well for the Borough within 45 days. If surface water is polluted, the Defendants must provide filtration systems to remedy the pollution. Additionally, the Defendant companies are prohibited from disposing of drill cuttings or other wastes on the property. Hydraulic fracturing fluids cannot be stored on-site, and the Defendants must maintain insurance policies to ensure that they can meet their financial obligations to the Borough if contamination occurs.140

Regulatory Investigations

In addition to civil lawsuits, government regulatory investigations have been spawned by environmental concerns about hydraulic fracturing. The Securities and Exchange Commission (“SEC”) recently asked shale companies to provide detailed information regarding the chemicals used in hydraulic fracturing.141 While the SEC is requesting that companies provide this information privately in light of proprietary concerns over fracturing techniques and chemical formulas, it is expected that the SEC will require shale companies to disclose at least some additional information publicly.142 Recent letters to shale companies have sought information about the chemicals being injected into the ground and efforts to mitigate environmental impacts and reduce water usage.143 The current SEC Enforcement inquiry is in its early stages, and it is difficult to predict how long or widespread the investigation will be or whether the SEC will ultimately bring an enforcement action against any company in the industry.

In June 2011, the New York Attorney General issued subpoenas to five shale operators for documents relating to the companies’ public disclosures about the environmental risks of hydraulic fracturing.144 The New York Attorney General also sued the Environmental Protection Agency and several other federal agencies in May 2011 in an effort to force a full environmental

139 See Municipal Authority Files Suit Over Drilling Activity, McLean Publishing Co. (Nov. 24, 2010) available at http://www.thecourierexpress.com/courierexpresscourierexpresslocal/900518-349/municipal-authority-files-suit- over-drilling-activity.html (last visited Apr. 14, 2011). 140 See Brockway Watershed Deal Reached, McLean Publishing Co. (Jan. 21, 2011) available at http://www.thecourierexpress.com/courierexpresscourierexpresslocal/906223-349/brockway-watershed-deal- reached.html (last visited Apr. 14, 2011). 141 See Tom Fowler, “What Is the SEC Really Looking For From Shale Gas Producers?,” FuelFix.com, September 22, 2011. 142 See Deborah Solomon, “SEC Bears Down on Fracking,” The Wall Street Journal, August 25, 2011. 143 Id. 144 See Ian Urbina, “New York Subpoenas Energy Firms,” The New York Times, June 1, 2011.

103

review of hydraulic fracturing under the National Environmental Policy Act before the Delaware River Basin Commission approves new regulations for natural gas extraction.145

Potential for Shareholder Litigation

Shale operators and other publicly traded companies involved in the production of shale gas and shale oil could also face the potential risk of private shareholder litigation arising from issues relating to reserve reporting, financial projections, or environmental issues.146

Conclusion

As detailed above, hydraulic fracturing and shale drilling litigation has rapidly increased since 2009. While merely speculation, the rise in such litigation evidenced by the cases discussed may be attributed, at least in part, to increased drilling in proximity to populated areas and heightened media scrutiny of the process. With most cases in the early stages of litigation, it likely will be a number of years before they are resolved. It will be interesting to see whether courts ultimately address the issue of the alleged water contamination before the final results of pending environmental studies and congressional investigations.

About the Author

Barclay R. Nicholson is a partner at Fulbright & Jaworski L.L.P. (Norton Rose Fulbright), Houston, Texas, and is a member of the firm’s Shale and Hydraulic Fracturing Task Force. Barclay serves as Editor of www.frackingblog.com, the firm’s blog devoted to hydraulic fracturing and shale development issues. His complete biography can be found at http://www.nortonrosefulbright.com/people/90049/, and he can be reached at [email protected] or (713) 651-3662.

145 See Lawrence Hurley, “N.Y. Natural Gas Fracking Lawsuit Raises NEPA Questions,” The New York Times, June 1, 2011. 146 See Gerard G. Pecht and Peter A. Stokes, “Securities Litigation and Enforcement Risks for Shale Operators,” Fulbright & Jaworski L.L.P. White Paper.

104 Appendix A Table of Cases Listed Alphabetically TABLE OF CASES ALPHABETICAL ORDER BY NAME

Case Name Pages State 2010-2011 Guy-Greenbrier Earthquake Swarm Victims v. Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC , Case No. 23CV-14-84, In the st Circuit Court of Faulkner County, Arkansas, 1 Division. 46 AR

Alexander, et al v. Chesapeake Appalachia LLC and Statoilhydro USA Onshore Properties, Inc ., No. 3:11-cv-00308-DNH-ATB (N.D. N.Y., March 18, 2011) 74-75 NY Allegheny Enterprises, Inc. v. Cohort Energy Company and J-W Operating Company, Case No. 4:10-cv-02539 (M.D. Pennsylvania, Dec. 15, 2010) 94 PA Andre v. EXCO Resources, Inc. and EXCO Operating Co. , No. 5:11-cv-00610-TS- MLH (W.D. La. April 15, 2011) 24-25 LA Anschutz Exploration Corp. v. Town of Dryden , 35 Misc.3d 450, 940 N.Y.S.2d 458 (N.Y. Sup. Ct. 2012). 54-56 NY Armstrong v. Chesapeake Appalachia, LLC, Chesapeake Energy Corp., and Nomac Drilling, LLC , No. 10-cv-000681 (Pa. Ct. Com. Pl., Oct. 27, 2010), removed to M.D. Pennsylvania, No. 3:10-cv-002453, on Dec. 6, 2010, remanded to Pa. Ct. Com. Pl. on July 29, 2011. 9PA

Aukema, et al v. Chesapeake Appalachia LLC and Statoilhydro USA Onshore Properties, Inc., No. 3:11-cv-00489-DNH-ATB (N.D. N.Y., April 29, 2011) 74-75 NY

Baker v. Anschutz Exploration Corp., Conrad Geoscience Corporation, and Pathfinder Energy Services, Inc., No. 6:11-cv-06119 (W.D.N.Y. March 9, 2011) 18-19 NY Bartlett v. Frontier Gas Services, LLC, Crestwood Arkansas Pipeline, LLC, Kinder Morgan Treating, LP, and Chesapeake Energy Corporation, Case No 4:11-cv- 0910 (E.D. Ark. Dec. 23, 2011) 34 AR Beck v. ConocoPhillips Company, No. 2011-484 (Dist. Ct. Panola County Tex., Dec. 1, 2011) 33 TX Becka v. Antero Resources a/k/a Antero Resources Appalachain [sic] Corp. s/k/a Antero Resources Appalacia [sic], LLC; No. 2:11-cv-01040 (W.D. Pa. August 12, 2011) 31-32 PA Beckman v. EXCO Resources, Inc. and EXCO Operating Co., 5:11-cv-00617-TS- MLH (W.D. La. April 18, 2011) 24-25 LA Berish v. Southwestern Energy Production Co. and Southwestern Energy Co. , No. 3:10-cv-01981 (M.D. Pa., Sept. 29, 2010) 7-9 PA

Berry v. Southwestern Energy Co., XTO Energy, Chesapeake Energy Corp., and BHP Billiton Petroleum , No. 1:11-cv-0045-DPM (E.D. Ark. May 17, 2011 26-27 AR Bidlack v. Chesapeake Appalachia, LLC, Chesapeake Energy Corporation, and Nomac Drilling, LLC, No. 3:11-cv-00129-ARC (M.D. Pa. (Scranton), Jan. 19, 2011) 12-13 PA

Boggs v. Landmark 4, LLC, No. 1:12-cv-00614 (N.D. Ohio, March 12, 2012) 35-36 OH

46406914_1.XLS TABLE OF CASES ALPHABETICAL ORDER BY NAME

Case Name Pages State Border Farm Trust, et al. v. Samson Resources Company, Case No. 12-2013-cv- 00067 (In District Court of Divide County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00141, on Nov. 15, 2013 81-83 ND Border Farm Trust, et al. v. SM Energy Company, Case No. 27-2013-cv-00245 (In District Court of McKenzie County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00140, on Nov. 15, 2013 81-83 ND Butts, et al v. Southwestern Energy Production Co., No. 3:12-cv-01330 (M.D. Pa. July 10, 2012) 39 PA Cabot Oil & Gas Corp. v. Casedhole Solutions Inc., et al., Cause No. 2014-14786, th In 127 Judicial District Court of Harris County, Texas, March 19, 2014 99-100 TX Cain v. XTO Energy Inc. and Waco Oil & Gas Co. Inc., No. 1:11-cv-00111-IMK, (N.D. W. Va., July 22, 2011) 73-74 WV Caldwell v. Kriebel Resources Co., LLC, et al., Case No. 2012-14-CD, 2012 WL 8745184 (Court of Common Pleas, Clearfield County, Aug. 3, 2012), affirmed at 72 A.3d 611, 1305 WDA 2012 (Pa. Super. Ct. June 21, 2013), hearing declined by Pennsylvania Supreme Court, November 26, 2013) 77-78 PA Canaan Wildlife Preserve, Inc., et al v. Chesapeake Energy Corporation, et al., Case No. 2:13-cv-02064-RTD (W.D. Ark., March 6, 2013) 78 AR Center for Biological Diversity and Sierra Club v. The Bureau of Land Management and Ken Salazar, Secretary of the Department of the Interior, No. CV-11-06174 (N.D. Cal., December 8, 2011) 88-89 CA Center for Biological Diversity and Sierra Club v. The Bureau of Land Management and Sally Jewell, Secretary of the Department of the Interior, No. CV- 13-01749 (N.D. Cal., April 18, 2013) 92 CA Center for Biological Diversity, et al v. California Department of Conservation, et al, Case No. RG12652054, In the Superior Court for the State of California for the City and County of Alameda (October 16, 2012) 91-92 CA Cherry Canyon Resources, L.P. v. Halliburton Company, et al., Case No. 2:13-cv- 00238, In the U.S. District Court for the Southern District of Texas, Corpus Christi Division 99 TX

Chesapeake Appalachia, LLC v. Russell E. Burkett and Gayle Burkett , Case No. 3:13-cv-03073, In the U.S. District Court for the Middle District of Pennsylvania 81-83 PA

Chesapeake Exploration LLC and CHK Utica, LLC v. Catlett Quality Plumbing & Heating, Inc., et al, No. 5:12-cv-00188 (N.D. Ohio, Jan. 25, 2012), on appeal to the U.S. Court of Appeals for the 6th Circuit, Case No. 12-4466 and Case No. 12-4517, filed Dec. 6, 2012 and Dec. 17, 2012 respectively, consolidated on May 1, 2013. Opinion issued Octoaber 30, 2013, 2012 U.S. Dist. LEXIS 156169, 2012 WL 5364259 (N.D. Ohio Oct. 30, 2012). 76 OH

46406914_1.XLS TABLE OF CASES ALPHABETICAL ORDER BY NAME

Case Name Pages State Citizens for Pennsylvania’s Future v. Ultra Resources, Inc. , No. 4:11-cv-01360- RDM (M.D. Pa. July 21, 2011 87-88 PA

City of Arlington, Texas, et al. v. Chesapeake Exploration, LLC, et al., Cause No. st 141-267203-13, In the 141 Judicial District Court of Tarrant County, Texas 84 TX City of Denton v. Eagleridge Energy LLC, et al., Case No. 2013-30817-211, In the th 211 Judicial District Court of Denton County, Texas, October 18, 2013) 59 TX

Coalition for Responsible Growth and Resource Conservation, et al v. Federal nd Energy Regulatory Commission , No. 12-566 (2 Cir., Feb. 28, 2012) 95-96 PA Coastal Oil and Gas Corp. v. Garza Energy Trust , 268 S.W.3d 1 (Tex. 2008) 70-71 TX Colorado Oil and Gas Association v. City of Fort Collins, Colorado, Case No. 2013CV031385, In the District Court, Larimer County, Colorado (December 3, 2013) 65-66 CO Colorado Oil and Gas Association v. City of Lafayette, Colorado, Case No. 2013CV031746, In the District Court, Boulder County, Colorado (December 3, 2013) 65-66 CO Colorado Oil and Gas Association v. City of Longmont, Colorado, Case No. _____, In the District Court of Weld County, Colorado (Dec. 17, 2012) 64-65 CO Colorado Oil and Gas Conservation Commission v. City of Longmont, Colorado, Case No. 2012-0730, In the District Court of Boulder County, Colorado (July 30, 2012) 64-65 CO Communities for A Better Environment, Asian Pacific Environmental Network, Sierra Club, and Natural Resources Defense Council v. Bay Area Air Quality Management District , Case No. ______, In the Superior Court of the State of California, County of San Francisco 101 CA Coniglio, et al v. Chesapeake Exploration LLC, et al. , Case No. 2012CVH27102, in the Carroll County, Ohio Court of Common Pleas 77 OH Cooperstown Holstein Corporation v. Town of Middlefield , 35 Misc.3d 767, 943 N.Y.S.2d 722 (N.Y. Sup. Ct. 2012) 56 NY Delaware Riverkeeper Network, et al v. United States Army Corps of Engineers, et al; No. 1:11-cv-03780 (E.D.N.Y., Aug. 4, 2011 86 NY Demchak Partners Limited Partnership, et al. v. Chesapeake Appalachia, L.L.C., No. 3:13-cv-02289 (M.D. Pa. Aug. 30, 2013) 80-81 PA Dillon v. Antero Resources a/k/a Antero Resources Appalachain [sic] Corp. s/k/a Anero Resources Appalacia [sic], LLC; No. 2:11-cv-01038 (W.D. Pa. August 11, 2011) 31-32 PA EQT Production Company v. John Opatkiewicz, et al. , Case No. GD-13-013489, In the Court of Common Pleas of Allegheny County, Pennsylvania 78-79 PA Evenson v. Antero Resources Corporation, Antero Resources Piceance Corporation, and John Doe Well Service Providers; No. 2011-cv-5118 ( Denver County Dist. Ct., July 20, 2011) 29-30 CO

46406914_1.XLS TABLE OF CASES ALPHABETICAL ORDER BY NAME

Case Name Pages State Finn v. EOG Resources, Inc., et al, Cause No. C2013-00343, In the 18th Judicial District Court of Johnson County, Texas. 46 TX Fiorentino v. Cabot Oil & Gas Corp.and Gas Search Drilling Services Corp. , No. 3:09-cv-02284 (M.D. Pa., Nov. 19, 2009) 3-5 PA Fort Worth Housing Finance Corporation, et al. v. Chesapeake Energy Corporation, et al., Cause No. 352-272138-14. In the 352nd Judicial District Court of Tarrant County, Texas (May 16, 2014) 84 TX Fort Worth Independent School District v. Chesapeake Energy Corporation, et al., Cause No. 236-272136-14, In the 236th Judicial District Court of Tarrant County, Texas (May 15, 2014) 83-84 TX Frey v. BHP Billiton Petroleum (Arkansas) Inc., et al., Case No. 4:11-cv-0475- JLH (E.D. Ark., June 9, 2011) 44 AR Ginardi v. Frontier Gas Services, LLC, Kinder Morgan Treating LP, Chesapeake Energy Corporation, and BHP Billiton Petroleum , No 4:11-cv-0420 BRW (E.D. Ark. May 17, 2011) 25-26 AR Green vs. Chesapeake Exploration, et al., Case No. 2012CV01223, in Stark County, Ohio Common Pleas Court 77 OH Hagy v. Equitable Production Co., Warren Drilling Co., Inc., BJ Services Co., USA, and Halliburton Energy Services, Inc. , No. 2:10-cv-01372 (S.D. W. Va., Dec. 10, 2010) 11-12 WV Hallowich v. Range Resources Corporation, Williams Gas/Laurel Mountain Midstream, Markwest Energy Partners, L.P., Markwest Energy Group, LLC, and Pennsylvania Department of Environmental Protection , Case No. 2010-3954 (Pa. Ct. Com. Pl. May 27, 2010) 5-6 PA Hamblet v. James Martin, in his Official capacity as Director, Office of Oil and Gas, West Virginia Department of Environmental Protection; Office of Oil and Gas, West Virginia Department of Environmental Protection; and EQT Production Company , Case No. 10-P-15 (Circuit Court of Doddridge County, W. Va., May 21, 2010) 84-85 WV Haney, et al. v. Range Resources Appalachia, LLC, et al, No. 2012-3534 (Pa. Ct. Com. Pl., May 25, 2012) 38 PA Hansen, et al. v. Hunt Oil Company , Case No. 13-2014-cv-00008 (In the District Court of Dunn County, North Dakota), removed to U.S. District Court for North Dakota, No. 1:14-cv-00021, on February 20, 2014 81-83 ND Harris v. Devon Energy Prod. Co., L.P. , No. 4:10-cv-00708 (E.D. Tex., Dec. 22, 2010) 14 TX Hearn v. BHP Billiton Petroleum (Arkansas) Inc., et al , Case No. 4:11-cv-00474- JLH (E.D. Ark., June 9, 2011) 44-46 AR Heinkel-Wolfe v. Williams Production Co., LLC, Mockingbird Pipeline, LP, XTO Energy, Inc., Gulftex Operating, Inc., Trio Consulting & Mgmt., LLC, and Enexco Inc. , No. 2010-40355-362 (362nd Dist. Court, Denton County, Texas, Nov. 3, 2010) 10-11 TX

46406914_1.XLS TABLE OF CASES ALPHABETICAL ORDER BY NAME

Case Name Pages State Hill, et al. v. Southwestern Energy Company, et al., No. 4:12-cv-500 (E.D. Ark., Aug. 10, 2012 40-41 AR

Hiser v. XTO Energy, Inc., No. 4:11-cv-00517-KGB (E.D. Ark. June 24, 2011) 27 AR Hughes, et al. v. Department of Environmental Quality, Case No. 312902 (State of Michigan Court of Appeals, February 11, 2014) 92-93 MI Hyder, et al., v. Chesapeake Exploration, LLC, et al., Cause No. 17-244547-10, In the 17th Judicial District Court of Tarrant County, Texas, affirmed Case No. 04-12- th 00769-CV, In the 4 Court of Appeals, San Antonio, Texas 84 TX In Re U.S. Energy Development Corp. , File No. 11-57 (New York Department of Environmental Protection, filed Jan. 24, 2012) 94-95 NY In re: Montreal Main & Atlantic Railroad Ltd . (Bankruptcy Case No. 1:13-bk- 10670, U.S. Bankruptcy Court for the District of Maine 101 ME In re: Montreal Maine & Atlantic Railroad Ltd., Case No. 1:13-mc-00194), In the U.S. District Court for Maine 101 ME In the Matter of Norse Energy Corporation USA v. Town of Dryden, et al ., 964 N.Y.S. 2d 714 (Sup. Ct., 3d. Dep’t, App. Div. 2013), leave to appeal granted , No. 2013-604, slip. op. 83668 (N.Y. Aug. 29, 2013) 54-56 NY Independent Petroleum Association of America and US Oil & Gas Association v. United States Environmental Protection Agency , No. 10-1233 (D.C. Aug. 12, 2010) 95 DC Jeffrey, et al v. Matthew T. Ryan, in his official capacity as Mayor, City of Binghamton, and the City Council, City of Binghamton, No CA2012001254, 37 Misc.3d 1204(A), 2012 WL 4513348 (N.Y. Supreme Court, Broome Co., Oct. 2, 2012) 57 NY Joint Landowners Coalition of New York, et al. v. Andrew M. Cuomo, et al., Case No. _____, In the Supreme Court of the State of New York, County of Albany 67-68 NY Kamuck v. Shell Energy Holdings GP, LLC, Shell Energy Holdings LP, LLC and SWEPI, LP (d/b/a Shell Western Exploration and Produciton, LP; No. 4:11-cv- 01425-MCC (M.D. Pa. August 3, 2011) 30-31 PA Kartch v. EOG Resources, No. 4:10-cv-00014 (D. N.D. March 4, 2010) 5ND Koonce v. Chesapeake Exploration, LLC and CHK Utica, LLC , No. 4:12-cv-00736- BYP (N.D. Ohio, March 27, 2012) 75-76 OH Kummer, et al. v. Continental Resources, Inc., Case No. 27-2013-cv-00244 (In District Court of McKenzie County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00135, on Nov. 15, 2013 81-83 ND Lane v. BHP Billiton Petroleum (Arkansas) Inc., et al, Case No. 4:11-cv-00477 (E.D. Ark., June 9, 2011) 44 AR Lawyer, et al. v. EOG Resources, Inc., Case No. 53-2014-cv-0043 (In District Court of Williams County, North Dakota), removed to U.S. District Court for North Dakota, No. 4:14-cv-00009, on January 31, 2014 81-83 ND

46406914_1.XLS TABLE OF CASES ALPHABETICAL ORDER BY NAME

Case Name Pages State Lawyer, et al. v. Kodiak Oil & Gas (USA) Inc., Case No. ______(In District Court of Williams County, North Dakota), removed to U.S. District Court for North Dakota, No. 4:14-cv-00014, on February 10, 2014 81-83 ND

Lenape Resources, Inc. v. Town of Avon, Town of Avon Board, and New York State Department of Environmental Conservation, Index No. 1060-2012, In the Superior Court of the State of New York, County of Livingston (November 13, 2012) 58-59 NY

Lipsky v. Durant, Carter, Coleman LLC, Silverado on the Brazos Development Company #1 Ltd., Jerry V. Durant, James T. Coleman, Estate of Preston Carter, Range Production Company, and Range Resources Corp., Cause No. CV11-0798 (Parker County Dist. Ct., June 20, 2011); on appeal Case No. 02-12-00098-CV, Second Court of Appeals, Fort Worth, Texas. 28-29 TX Magers, et ux v. Chesapeake Appalachia, L.L.C., CNX Gas Company, L.L.C., and Columbia Gas Transmission, L.L.C ., No. 5:12-cv-00049-FPS (N.D. W.Va., Sept. 4, 2012 41-42 WV Mahan, et al. v. Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC, Case No. 4:13-cv-184 JLH (E.D. Ark., April 1, 2013) 45-46 AR

Mangan v. Landmark 4, LLC, No. 1:12-cv-00613 (N.D. Ohio, March 12, 2012) 35-36 OH Manning, et al v. WPX Energy Inc. and The Williams Companies, Inc., No. 3:12- CV-00646 (M.D. Pa., April 9, 2012) 36-37 PA Maring v. John Nalbone, Jr., Universal Resource Oil & Gas, Enervest Operating LLC, and Dallas Morris Drilling Inc. , No. K12009001499 (N.Y. Sup. Ct., Aug. 27, 2009) 2NY

MarkWest Liberty Midstream & Resources LLC v. Cecil Township, Case No. 430 MD 2012, In the Commonwealth Court of Pennsylvania (June 29, 2012) 62 PA May, et al. v. BHP Billiton Petroleum (Fayetteville) LLC, No. 4:13-cv-0494 (E.D. Ark. August 23, 2013) 79-80 AR Miller Family Partnership, et al. v. HRC Operating, LLC, Case No. 53-2013-cv- 01190 (In District Court of Williams County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00137, on Nov. 15, 2013 81-83 ND Miller, et al. v. Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC , Case No. 4:13-CV-131 JMM (E.D. Ark., Mar. 11, 2013) 45 AR

Mitchell v. EnCana Oil & Gas (USA), Inc., Chesapeake Operating, Inc., and Chesapeake Exploration, LLC , No. 3:10-cv-02555 (N.D. Tex., Dec. 15, 2010) 12 TX Norse Energy Corp. USA v. Town of Dryden, et al. , Case No. 2013 -00245, In the New York State Court of Appeals. 54-56 NY Northeast Natural Energy, LLC and Enrout Properties, LLC v. The City of Morgantown, West Virginia , Civil Action No. 11-C-411; In the Circuit Court of Monongalia County, West Virginia (June 23, 2011) 52-53 WV

46406914_1.XLS TABLE OF CASES ALPHABETICAL ORDER BY NAME

Case Name Pages State Otis v. Chesapeake Appalachia, LLC, Chesapeake Energy Corporation, and Nomac Drilling, LLC, No. 3:11-cv-00115-ARC (M.D. Pa. (Scranton), Jan. 18, 2011) 12-13 PA Ouachita Watch League, et al v. Judith L. Henry, Forest Supervisor, Ozark-St. Francis National Forests; United States Forest Service, et al, No. 4:11-cv-425 (E.D. Ark., May 19, 2011) 85 AR Palmer v. BHP Billiton Petroleum (Arkansas) Inc., et al, Case No. 4:11-cv-00476 (E.D. Ark., June 9, 2011) 44 AR (USA), Inc., Halliburton Co., Republic Energy, Inc., Ryder Scott Co., LP, Ryder Scott Oil Co., Tejas Production Services, Inc., and Tejas Western Corp. , No. 11- 20-22 TX Penneco Oil Co., Inc., et al. v. County of Fayette, Pennsylvania, et al. , 4 A.3d 722 (Pa. Commw. Ct. June 22, 2010), appeal denied , 2012 Pa. LEXIS 40, 41 (Pa. Jan. 6, 2012) 57-58 PA Pennsylvania Oil and Gas Association, et al. v. U.S. Forest Service, et al., Case No. 1:08-cv-0162, In the U.S. District Court for the Western District of Pennsylvania 68-69 PA Perna v. Reserve Oil & Gas, Inc., No. 11-c-2284 (Circuit Court of Kanawha County, West Virginia, Dec. 21, 2011) 33-34 WV Pollock, et al. v. Energy Corporation of America, No. 2:10-cv-01553 (W.D. Pa. Nov. 30, 2010) 72-73 PA

Powder River Basin Resource Council, Wyoming Outdoor Council, and National Wildlife Federation v. U.S. Bureau of Land Management, Kenneth Salazar in his official capacity as Secretary of the Interior, Mike Pool in his official capacity as Acting Director of the Bureau of Land Management, Donald Simpson in his official capacity as Wyoming State Director of the Bureau of Land Management, and Duane Spencer in his official capacity as the Buffalo Field Office Manager of the Bureau of Land Management, Case No. 1:12-cv-00996 (D.C. June 19, 2012) 90 DC Powder River Basin Resource Council, Wyoming Outdoor Council, Earthworks, and OMB Watch v. Wyoming Oil and Gas Conservation Commission, Case No. 94650, In the 7th Judicial District Court of the State of Wyoming, in and for the County of Natrona 96-97 WY Protect Our Loveland, Inc. v. City of Loveland, Colorado and City Council of Loveland, Colorado , Case No. 2013CV31142, In the District Court, Larimer County, Colorado 59 CO Pruitt, et al v. Southwestern Energy Company, No. 4:12-cv-00423 (E.D. Ark., Nov. 2, 2012) 41 AR Ramsey, et al. v. Desoto Gathering Company, LLC , Case No. 23CV-14-258, In the Circuit Court of Faulkner County, Arkansas for the 20th Judicial District (April 24, 2014) 43 AR

46406914_1.XLS TABLE OF CASES ALPHABETICAL ORDER BY NAME

Case Name Pages State Robinson Township, et al v. Commonwealth of Pennsylvania, et al, No. 284 M.D. 2012 (Commonwealth Court of Pennsylvania, March 29, 2012), which is being appealed, 63 MAP 2012, 64 MAP 2012, 72 MAP 2012 and 73 MAP 2012 (Supreme Court, Middle District, August 17, 2012) 61-64 PA Rodriguez, Dr. Alfonso v. Michael L. Krancer, in his official capacity as Secretary of the Pennsylvania Department of Environmental Protection, et al., Case No. 3:12- cv-01458 (M.D. Pa. July 27, 2012) 98 PA Roth v. Cabot Oil and Gas Corporation and Gas Search Drilling Services Corporation, No. 3:12-cv-00898 (M.D. Pa. May 14, 2012) 37 PA San Juan Citizens Alliance, et al v. Mark Stiles, in his official capacity as San Juan National Forest Supervisor and BLM Center Manager of the San Juan Public th Lands Center; et al, 654 F.3d 1038 (10 Cir. 2011) 87 CO Sarner v. City of Loveland, Colorado , Case No. 2013CV03171, In the District Court of Larimer County, Colorado 59 CO Scoggin v. Cudd Pumping Services, Inc, RPC Inc., and Cudd Energy Services. No. 4:11-cv-00678-JMM (E.D. Ark. Sept. 12, 2011 32 AR Scoggin, et al v. Southwestern Energy Company, No. 4:12-cv-763 (E.D. Ark., December 7, 2012) 42 AR

Scoma v. Chesapeake Energy Corp., Chesapeake Operating, Inc., and Chesapeake Exploration, LLC , No. 3:10-cv-01385 (N.D. Tex., July 15, 2010) 6TX Seitel Data Ltd. V. Center Township, et al., Case No. 492 M.D. 2013, In the Commonwealth Court of Pennsylvania, October 3, 2013 69-70 PA Seitel Data Ltd. V. Greene Township, et al., Case No. 494 M.D. 2013, In the Commonwealth Court of Pennsylvania, October 3, 2013 69-70 PA Seitel Data Ltd. v. Hopewell Township, et al. , Case No. 4 WAP 2014, In the Supreme Court of the State of Pennsylvania 70 PA Seitel Data Ltd. V. Shippingport Borough, et al., Case No. 493 M.D. 2013, In the Commonwealth Court of Pennsylvania, October 3, 2013 69-70 PA Sheatsley v. Chesapeake Operating, Inc. and Clarita Operating, LLC, Case No. 4:11-cv-00353-JLH (E.D. Ark., April 4, 2011) 44 AR Sheryle J. Olson Family Mineral Trust, et al. v. Hess Corporation and Hess Bakken Investments II, LLC, Case No. 13-2014-000007 (In the District Court of Dunn County, North Dakota, Southwest Judicial District), removed to U.S. District Court for North Dakota, No. 1:14-cv-00020, on February 18, 2014 81-83 ND

Sierra Club, et al. v. The Village of Painted Post, et al. , Index No. 2012-0810CV, In th State of New York, Supreme Court, County of Steuben (June 25, 2012) 90-91 NY Singer, et al. v. Statoil Oil & Gas LP, Case No. 27-2013-cv-00243 (In District Court of McKenzie County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00138 on Nov. 15, 2013 81-83 ND

46406914_1.XLS TABLE OF CASES ALPHABETICAL ORDER BY NAME

Case Name Pages State

Sizelove v. Williams Production Co., LLC, Mockingbird Pipeline, LP, XTO Energy, Inc., Gulftex Operating, Inc., Trio Consulting & Mgmt., LLC, and Enexco, Inc., No. 2010-50355-367 (367th Dist. Court, Denton County, Tex. Nov. 3, 2010) 9-10 TX Smith v. Devon Energy Production Company, L.P., Case No. 4:11-cv-00104 (E.D. Texas, March 7, 2011) (originally filed in N.D. Tex., Case No. 3:11-cv-00196, on Jan. 31, 2011) 18 TX Smith, et al v. Southwestern Energy Company, No. 4:12-cv-00423 (E.D. Ark., July 11, 2012) 39-40 AR Snow, et al. v. Chesapeake Operating, Inc., et al., Cause No. 342-271361-14, In the nd 342 Judicial District Court of Tarrant County, Texas (April 1, 2014) 83-84 TX Sorenson, et al. v. Burlington Resources Oil & Gas Company, LP, Case No. 27- 2013-cv-00242 (In District Court of McKenzie County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv- 00132, on Nov. 14, 2013 81-83 ND Star-Telegram, Inc. v. Chesapeake Exploration LLC, et al., Cause No. 096-272142- th 14, In the 96 Judicial District Court of Tarrant County, Texas (May 16, 2014) 83-84 State of New York v. United States Army Corps of Engineers, et al ; No. 1:11-cv- 02599 (E.D.N.Y., May 31, 2011) 86 NY State of New York v. United States Army Corps of Engineers, et al ; No. 1:11-cv- 03857 (E.D.N.Y., Aug. 10, 2011) 86 NY State of Ohio ex rel. Jack Morrison, Jr., Law Director City of Munroe Falls, Ohio, et al. v. Beck Energy Corporation, et al. , Case No. CV2011-04-1897; appealed to the 9th Appellate District, Summit County, Ohio, Case No. 25953, 2013-Ohio-356 (Feb. 8, 2013); currently in the Supreme Court of Ohio, Case No. 2013-0465 (filed Mar. 22, 2013) 61 OH Strong v. ConocoPhillips Company, No. 2011-487 (Dist. Ct. Panola County Tex, Dec. 2, 2011) 33 TX Strudley v. Antero Resources Corp., Calfrac Well Services, and Frontier Drilling LLC , No. 2011-cv-2218 (Denver County Dist. Ct., Mar. 23, 2011) 22-24 CO Sutterfield, et al. v. Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC, Case No. 4:13-cv-183 JLH (E.D. Ark., April 1, 2013) 45-46 AR SWEPI L.P. v. Mora County, New Mexico, Mora County Board of County Commissioners, et al. , Case No. 1:14-CV-00035 (D. N.M. January 10, 2014) 60 NM Teekell v. Chesapeake Operating, Inc., Crow Horizons Company, JPD Energy, Inc., and Chesapeake Louisiana, L.P., No. 5:12-cv-00044 (W.D. La. Jan. 12, 2012) 34-35 LA Teel v. Chesapeake Appalachia, LLC , No. 5:11-cv-00005-FPS (N.D. W. Va. January 6, 2011) 14-15 WV Texas Mesa Vista 2000, Ltd. v. Chesapeake Operating, Inc., et al., Cause No. 048- 271363-14, In the 48th Judicial District Court of Tarrant County, Texas (April 1, 2014) 83-84 TX

46406914_1.XLS TABLE OF CASES ALPHABETICAL ORDER BY NAME

Case Name Pages State The Ozark Society v. United States Forest Service; et al; No. 4:11-cv-00782 (E.D. Ark., October 31, 2011) 88 AR Thomas, et al. v. Chesapeake Operating, Inc. and BHP Billiton Petroleum (Fayetteville) LLC , Case No. 4:13-cv-182 JLH (E.D. Ark., April 1, 2013) 45 AR Trinity East Energy LLC v. Dallas, Case No. DC-14-01443, In the 192nd Judicial District Court of Dallas, Texas (February 13, 2014) 60-61 TX Trinity Valley School, et al. v. Chesapeake Operating, Inc., et al., Case No. 3:13-cv- 01082, In the U.S. District Court for the Northern District of Texas, Dallas Division (March 13, 2013) 84 TX

Tucker v. Southwestern Energy Co., XTO Energy, Chesapeake Energy Corp., and BHP Billiton Petroleum , No. 1:11-cv-0044-DPM (E.D. Ark. May 17, 2011) 26-27 AR United States v. Range Prod. Co., et al. , No. 3:11-cv-00116 (N.D. Tex., Jan. 18, 2011) 15-17 TX Vermillion, et al. v. Mora County, New Mexico, et al., No. 1:13-cv-01095 (N.M., November 11, 2013) 60 NM

Vogel, et al. v. Marathon Oil Company, Case No. 31-2013-cv-00163 (In District Court of Mountrail County, North Dakota, Northwest Judicia+A110l District) 81-83 ND Vogel, et al. v. WPX Energy Williston, LLC, Case No. 31-2013-cv-00162 (In District Court of Mountrail County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00133, on Nov. 15, 2013Wallach, et al. v. The New York State Department of Environmental Conservation, 81-83 ND et al., Index No. 6770-13, In the Supreme Court of the State of New York, County of Albany (December 17, 2013) 66-67 NY Weiden Lake Property Owners Association, Inc. v. Jeff A. Klansky and Cabot Oil & Gas Corporation , 2011 N.Y. Misc. LEXIS 4081 (Sup. Ct.-Sullivan County, Aug. 18, 2011) 53 NY Whiteman v. Chesapeake Appalachia, LLC , No. 5:11-cv-00031-FPS (N.D. W. Va. February 23, 2011) 17-18 WV

WildEarth Guardians v. Unites States Forest Service, United States Bureau of Land Management, et al., Case No. 2:14-cv-00349, (D. Utah, May 7, 2014) 93-94 UT Wisdahl, et al. v. Crescent Point Energy U.S. Corp., Case No. 53-2013-cv-01189 (In District Court of Williams County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00139, on Nov. 15, 2013 81-83 ND Wisdahl, et al. v. XTO Energy, Inc., Case No. 53-2013-cv-01188 (In District Court of Williams County, North Dakota, Northwest Judicial District), removed to U.S. District Court for North Dakota, No. 4:13-cv-00136, on Nov. 15, 2013 81-83 ND Wiser, et al v. EnerVest Operating LLC and Belden & Blake Corporation, No. 3:10- cv-00794-DEP (N.D. N.Y., July 2, 2010) 71-72 NY

46406914_1.XLS TABLE OF CASES ALPHABETICAL ORDER BY NAME

Case Name Pages State Zimmermann v. Atlas America, LLC , No. 2009-7564 (Pa. Ct. Com. Pl., Sept. 21, 2009) 2-3 PA

46406914_1.XLS Financial institutions Energy Infrastructure, mining and commodities Transport Technology and innovation Life sciences and healthcare

Appendix B Resume of Barclay R. Nicholson Barclay Richard Nicholson

Partner, Houston Fulbright & Jaworski +1 713 651 3662 [email protected]

Barclay Nicholson offers clients in-depth knowledge and experience in energy-related and business disputes. As a partner in the Houston office, Barclay has represented a broad range of clients from among the largest of the Fortune 500 Companies to entrepreneurial business owners. He has significant experience in handling energy related litigation and has represented some of the world's major oil and gas producing and refining companies as well as some of the nation's biggest drilling and E&P companies. Chambers USA, America's Leading Lawyers for Business, noted Barclay is, "intelligent, good natured and more than capable of handling a large-scale case." Barclay is a member of the Shale and Hydraulic Fracturing Task Force and has authored numerous articles and given speeches both across the nation and internationally on all aspects of unconventional oil and gas plays. Barclay is the author of the Analysis of Litigation Involving Shale & Hydraulic Fracturing which details all of the litigation across the country involving shale plays. Barclay also serves as the Editor of www.frackingblog.com, a blog devoted to hydraulic fracturing. Barclay has assisted clients in all of North America's major shale plays, including the Bakken, Barnett, Eagle Ford, Fayetteville, Haynesville, Marcellus, Pearsall and Utica fields. Internationally, Barclay has been chosen to assist the US State Department Bureau of Energy and the US Department of Commerce, through its Commercial Law Development Program, in advising the Countries of India, Colombia, Chile, and Afghanistan on their unconventional and shale oil and gas resources and the regulatory and legal matters associated with those resources. Most recently Barclay served on: the US/Afghanistan Cooperation on Extractive Industries Development Program that took place in Doha, Qatar, the US/Colombia Cooperation on Coal Bed Methane Extraction and Unconventional Resources in Bogota, Colombia, the US/India Cooperation on Unconventional Natural Gas Consultations in New Delhi, India and the US/Chile Consultations on Unconventional Natural Gas in Santiago, Chile. Barclay also serves as Chair of the Houston Bar Association's Litigation Section, which has more than 1,200 members. Barclay has handled commercial cases that involve amounts exceeding one billion dollars. He has represented clients in numerous proceedings both in the United States (in federal and state courts) and abroad (in the LCIA, ICC, UNCITRAL and ICDR). Additionally, he has represented clients before various administrative and congressional oversight boards. Previously, Barclay served as Briefing Attorney for Justice Alberto Gonzales of the Texas Supreme Court, who later served as the United States Attorney General. He also served as Briefing Clerk for Chief Justice Thomas R. Phillips of the Texas Supreme Court.

Areas of Concentration • Energy litigation • Shale and hydraulic fracturing • International Arbitration • Construction • Insurance and Reinsurance • Environmental • IP disputes • Western lands and energy

Representative Experience Recent, significant litigation and arbitration activities include: Energy Related Representations include: • Class action litigation involving environmental concerns related to unconventional oil and gas drilling operations • Litigation arising from multiple oil & gas leases and related service contracts • Counseled companies regarding the disclosure of hydraulic fracturing fluids • Dispute regarding Joint Operating Agreement between oil and gas operators • Lawsuits involving claims of groundwater contamination due to hydraulic fracturing operations • Major oil and gas drilling company in dispute regarding drilling operations • British LNG provider in commercial dispute concerning multiple multinational JOA and PSA contracts pending before LCIA • Major oil producer in ICC arbitration involving a failed merger • Canadian oil and gas company in ICC arbitration dispute concerning West African offshore oil fields • Major multinational producer and refiner in dispute with government over offshore oil rights • Multinational oil producer and refiner over government related claims in ICC arbitration • International gas company in multiple take-or-pay contract disputes • Regional drilling and exploration company in well damage case in Texas State Court • Local oil and gas exploration company regarding a deceptive trade practices action pending in Federal Court in Houston Commercial Litigation Representations include: • Served as lead trial counsel for national newspaper in complex breach of contract and breach of fiduciary duty case in state court • Small manufacturing business owner in a state court dispute regarding a buy-sell agreement • Lead attorney for oil field equipment manufacturer in contractual business dispute regarding a buy-out agreement • International law firm in a malpractice action • Major media company in a wrongful death case • Premises owner in a suit that involved catastrophic personal injury • Prosecuted over 20 lawsuits on behalf of the City of Houston, as first chair attorney Construction Related Representations include: • One of the world's largest oil and gas companies in construction dispute involving multinational EPC contract • Regional pipeline company in AAA arbitration involving construction delay dispute, served as lead plaintiffs' attorney • National manufacturing company in bench trial in South Texas that resulted in a take nothing judgment and recovery on counter-claim Intellectual Property Representations include: • Fortune 500 Energy Company in a week long complex patent infringement jury trial in Federal Court for the Eastern District of Texas • Major media company as defendant in TV related technology matter in Federal Court for the Eastern District of Texas • International consumer electronics company in patent case involving MP3 players in Federal Court in Southern District of Texas • International medical device manufacturing company in patent case involving surgical devices in Federal Court for the Eastern District of Texas First Party Insurance and Bad-Faith Representations include: • Fortune 500 Insurance Company in coverage and bad-faith lawsuits in state and federal court with exposure totaling over $250 million • One of the world's leading insurance companies in a bad-faith trial lasting over four weeks in Jefferson Parrish, State Court in Louisiana • Multinational insurance company against bad-faith claims brought in Federal Court in Missouri • International insurance carrier in first party litigation case involving bad-faith claims arising out of excess insurance policy • National insurance company in appeal involving contractual dispute between companies which resulted widely cited published court of appeals decision • National insurance company in case of first impression that involved bad-faith; case was won at summary judgment and subsequently upheld at appellate level and published opinion has become widely cited as precedent Professional Activities • American Bar Association − International Energy & Natural Resources Committee, Vice-Chair (2011 - 2013) − Business Torts Litigation Committee, Committee Leadership (2011 - 2012) − Energy Litigation Committee, Senior Leadership and Programs Chair (2013 - 2014) − Environment, Energy and Resources Section − Litigation Section − Tort and Insurance Practice Section, Former Co-Chair − Continuing Legal Education Committee, Standing Committee Member − Advisory Panel • State Bar of Texas − Litigation Section − Oil, Gas & Energy Resources Section − Construction Section − Professional Liability Section • Federal Bar Association • College of the State Bar of Texas (2006 - 2013) • Pro Bono College of the State Bar of Texas (2006 - 2013) • Houston Bar Foundation, Fellow • Texas Bar Foundation, Fellow • Houston Bar Association − Chair of the Litigation Section (2013 - 2014) − Chair-Elect of the Litigation Section (2012 - 2013) − Continuing Legal Education Committee (2011 - 2012) − Membership Committee (2011 - 2012) − Dispute Resolution Committee, Board of Director (2008 - 2010) − Speakers Bureau Committee (2008 - 2009, 2011 - 2012) − Professionalism Committee (2007 - 2009) − Fee Disputes Committee (2006 - 2008) • The General Counsel Forum − Board Member and Corporate Secretary (2013 - 2014) • Houston Young Lawyers Association − Bench Book Committee, Chairman and Editor-in-Chief (2005 - 2007) • World Affairs Council of Houston • Association of International Petroleum Negotiators • Texas Independent Producers & Royalty Owners Association • The Institute for Energy Law − Vice-Chair and Member of the Executive Committee (2014 - 2016) − Member of the Advisory Board • Independent Petroleum Association of America − Member of Land & Royalty Committee − Member of Environment & Safety Committee • Energy & Mineral Law Foundation • Rocky Mountain Mineral Law Foundation • Texas Association of Defense Counsel • Texas Supreme Court Historical Society • New York State Bar Association • Colorado State Bar Association • Strauss Fellow, Next Generation Project Texas, LBJ School of Public Affairs, The University of Texas

Professional Honors • Chambers USA, America's Leading Lawyers for Business, – Chambers and Partners (2011 - 2013) • Texas Top Rated Lawyer – LexisNexis Martindale-Hubbell (2013 - 2014) • Who's Who in Energy, Finalist -- Houston Business Journal (2013) • Top Lawyers in Houston - H Texas Magazine (2013) • Texas Rising Star – Thomson Reuters (2005 - 2010, 2013) • Houston's Top Lawyers – H Texas Magazine (2006 - 2009) • AV Rated Lawyer – LexisNexis Martindale-Hubbell • Lawyer on the Fast Track – Commercial Litigation, H Texas Magazine (2004 - 2006) • Who's Who in America - Marquis (2012 - 2014) Publications Barclay has authored a number of articles on hydraulic fracturing litigation. He has also authored articles on other topics including: breach of contract damage issues, construction litigation issues, insurance coverage disputes, insurance bad faith and causation issues and international arbitration case studies. Barclay also has authored several articles for in-house legal departments. Barclay routines blogs on energy related issues at www.frackingblog.com. Other publications include:

• "Pollution Exclusion: "Sudden and Accidental" applied to legacy clean-up sites," Insurance Focus, March, 2014 • "Nevada Drafts Hydraulic Fracturing Regulations," Lexology, February 27, 2014 • "Emergency Order Requires Testing and Classification of Crude Oil Transported by Rail," Lexology, February 26, 2014 • "New York Landowners Sue State Officials Over Delays in Hydraulic Fracturing Decision," Lexology, February 26, 2014 • "Montana Disclosure Regulations, Effective August 26, 2011," Lexology, February 25, 2014 • "Crude by Rail Safety Initiative Announce by U.S. Department of Transportation and the Association of American Railroads," Lexology, February 24, 2014 • "Crude-by-rail safety initiative announced by US Department of Transportation and the Association of American Railroads," Norton Rose Fulbright LLP, February 21, 2014 • "California Drought Being Used to Push for a Moratorium on Hydraulic Fracturing," Lexology, February 19, 2014 • "EPA's Inspector General Announces Research Concerning Potential Threats to Water Resources," Lexology, February 13, 2014 • "US Department of Transportation Issues Notices of Probably Violation to three Companies for Mislabeling Crude Oil Rail Shipments," Legal Update Norton Rose Fulbright, February 2014 • "Shale Gas: A Practitioner's Guide to Shale Gas & Other Unconventional Resources," Globe Law & Business, February 2014 • "EPA Issues Final Permitting Guidance for Oil and Gas Hydraulic Fracturing Activities Using Diesl Fuels," Lexology, February 12, 2014 • "U.S. Dept. of Transporation Issues Notices of Probable Violations for Mislabeling Crude Oil Rail Shipments," Lexology, February 10, 2014 • "2014 – What is on the Horizon for the Insurance Industry?" Insurance Focus, February 2014 • "EU's Fracking Future Remains Uncertain After Guidance," Energy Law 360 and Environmental Law 360, Feburary 13, 2014 • "Pennsylvania Court Reverses Decision to Reconsider Order Allowing Pre-Fracking Testing," Lexology, February 7, 2014 • "Pennsylvania Court to Consider Gag Rule Relating to Hydraulic Fracturing and Physicians," Lexology, February 6, 2014 • "Sustainable Shale Gas Growth Zones Proposed by President," Lexology, February 4, 2014 • "2014 - What is on the Horizon for the Insurance Industry?," Lexology, February, 3, 2014 • "Regulatory Comlpexity Governs Rail, Truck Oil Field Transportation," Oil & Gas Journal, January, 2014 • "Virginia Plans to Expand Disclosure of Fracking Chemicals, " Lexology, January 31, 2014 • "California Court Dismisses Lawsuit Filed by Environmental Groups to Block Hydraulic Fracturing." Lexology, January 30, 2014 • "North Carolina Mining and Energy Commission Approves Trade Secret Protection for Chemicals Used in Hydraulic Fracturing", Lexology, January 29, 2014 • "What's shaking? Induced seismicity," Lexology, January 28, 2014 • "European Commission Issues Recommendation for Hydraulic Fracturing," Lexology, January 27, 2014 • "Pennsylvania Supreme Court Affirms Lower Court's Decision to Deny Legislators' Application to Intervene in Act 13 Lawsuit," Lexology, January 24, 2014 • "U.S. Department of Transportation Meets with Oil and Rail Industry Leaders to Discuss Transport Safety Issues," Lexology, January 23, 2014 • "Municipalities Urge Pennsylvania Supreme Court Not to Reconsider Its Decision Declaring Parts of Act 13 Unconstitutional," Lexology, January 22, 2014 • "Reuse of Acid Mine Water in Hydraulic Fracturing Operations Proposed in Pennsylvania," Lexology, January 21, 2014 • "Florida Considers Hydraulic Fracturing Disclosure Requlations," Lexology, January 20, 2014 • "Insurance and Hydraulic Fracturing," Insurance Focus, December 2013 • "Fracking Bans in Colorado and Ohio May Be Unenforceable," Law 360, November 21, 2013 • "Shale Gas and Hydraulic Fracturing: The Latest Developments," Global Infrastructure, Volume VII - October 2013 • "Hydraulic Fracturing as a Subsurface Trespass," The Energy Law Advisor, Volume 7, Number 3 - October 2013 • Interview "Shale We Dance?" The Oil & Gas Year, The Who's Who of the Global Energy Industry - Eagle Ford, Texas 2013 • Co-author, "Trade secrets and the regulation of hydraulic fracturing: Toward a global perspective," Norton Rose and Fulbright White Paper (March 2013); reprinted in 2013 International Energy Law Review 154-167 & 203-213 (Issues 4 & 5 2013) • "Lone Pine Order Overturned in Fracking Lawsuit," International Law Office, online media partner to Association of Corporate Counsel and International Bar Association, September 9, 2013 • Q & A with Barclay Nicholson, Attorney advises oil, gas firms on Fracking Suits, Thomson Reuters, By Mica Rosenberg, August 27, 2013 • "Insight: Arkansas Lawsuits Test Fracking Wastewater Link to Quakes" Reuters, August 27,2013 • "Shale Gas in The United States: A Revolution" Infrastructure Journal, July 12, 2013 • Co-author, "Lone Pine order overturned by Intermediate Appellate Court in Colorado fracking lawsuit" Norton Rose Fulbright Legal Update, July 11, 2013 • Co-author, "Analysis of Litigation Involving Shale and Hydraulic Fracturing, Part 2" International Energy Law Review, 2013 Vol. 32 Issue 3, June 2013 • Interviewed, "Interior Department Extends Comment Period on Fracking Rule," NPR Radio, June 7, 2013 • Quoted in "Lawsuits linked to fracking increasing," San Antonio Express News Business Section, May 29, 2013 • Quoted in, "Shale boom's legal issues bubble to surface," Houston Chronicle Business Section, May 28, 2013 • Quoted in "A Fractured Market," CDR Commercial Dispute Resolution, May-June 2013 • Co-author, "Pennsylvania Supreme Court Reaffirms that Natural Gas Is Not a 'Mineral' in Private Deed Transfers," Fulbright Briefing, April 26, 2013 • Co-author, "Trade secrets and the regulation of hydraulic fracturing - Toward a global perspective," Energy, April 11, 2013 • "Energy Multi-Jurisdictional Guide 2013: Oil & Gas Q&A: United States," Practical Law Company, April 1, 2013 • Co-author, "Analysis of Litigation Involving Shale and Hydraulic Fracturing, Part 1," International Energy Law Review, 2013 Vol. 32 Issue 2, March 2013 • Co-author, "Analysis of Hydraulic Fracturing and Shale Drilling Litigation," The International Law Firm of Fulbright & Jaworski - Energy, March 4, 2013 • "Hydraulic Fracturing Frenzy: What's Up?," ABA Energy and Natural Resources Litigation Committee Newsletter, February 2013 • "Shale Gas and Other Unconventional Resources: A Practitioners Guide," Globe Law and Business, January 9, 2013, also available on Amazon. • Co-author, "New Drilling and Recycling Regulations Proposed for Fracking" International Law Office, November 5, 2012 • Co-author, "Analysis of Litigation Involving Shale and Hydraulic Fracturing," The International Law Firm of Fulbright & Jaworski - Energy, November 2012 • Co-author, "New Drilling and Recycling Regulations Proposed by Texas Railroad Commission Relating to Hydraulic Fracturing," Fulbright Briefing, October 4, 2012 • "Fracking's Alleged Links to Water Contamination and Earthquakes," ABA Section of Litigation, Energy Litigation Committee, May 9, 2012 • "Hydraulic Fracturing As a Subsurface Trespass," ABA Energy Committee Newsletter, Vol. 9, No.2, May, 2012 • Co-author, "Landowners Prevail in Dispute with Regulators Over Ownership of Under Ground Water," Powell Shale Digest, March 19, 2012 • "Courts Unclear when Fracturing is Subsurface Trespass," The American Oil & Gas Reporter, February 2012 • "Fracing Focus Shifts to Water," Oil & Gas Investor, February 2012 • "Fracing Focus Shifts to Water," Unconventional Oil & Gas Center, February 8, 2012 • Co-author, "Department of Interior Releases Draft Rule of Well Stimulation," International Law Office, February 27, 2012 • "States on Standby for Frack Rules," Energy Bisnow, February 24, 2012 • Co-author, "Department of Interior Releases Draft Rule of Well Stimulation," Fulbright Briefing, February 10, 2012 • Interviewed, "Analysis: Green Groups Find Success Fighting Shale Oil Boom," Reuters, December 27, 2011 also published on Yahoo! News, MSNBC • "Trends Emerge on Hydraulic Fracturing Litigation," Oil & Gas Journal, December 5, 2011 Issue • Co-author, "Texas Railroad Commission Adopts Hydraulic Fracturing Chemical Disclosure Rule, Effective February 1, 2012," Fulbright Alert, December 14, 2011 • Co-author, "Hydraulic Fracturing Studies Release Preliminary Plans and Initial Reports," Fulbright Briefing, November 15, 2011 • "Texas Passes Law Requiring Disclosure of Chemicals Used in Hydraulic Fracturing Fluid," The Houston Lawyer, September/October 2011 • Co-author, "Tracking Fracking Case Law: Hydraulic Fracturing Litigation," Natural Resources & Environment Magazine, Fall 2011 • Co-author, "Texas, Other States Move Forward With Hydraulic Fracturing Disclosure Regulations," Fulbright Briefing, October 13, 2011 • Co-author, "Analysis of Litigation Involving Shale & Hydraulic Fracturing," Fulbright White Paper, September 28, 2011 • Co-author, "Texas Supreme Court Issues Three Key Energy Opinions in August," Fulbright Briefing, September 15, 2011 • Author, "Key Issues Plague the Eagle Ford shale play in South Texas," Houston Business Journal, week of August 19-25, 2011 • Interviewed, "Examining Texas' Hydraulic Fracturing Disclosure Law," E&P Magazine, Hart Energy, August 2, 2011 • Co-author, "Texas Joins States Requiring Disclosure of Hydraulic Fracturing Fluids," International Law Office, June 27, 2011 • Author, "Hydraulic Fracing: An Overview of the Issues," Trends in Energy Disputes 2011, Fulbright & Jaworski, June 8, 2011 • Co-author, "Texas Legislature Joins Growing Number of States in Requiring Disclosure of Hydraulic Fracturing Fluids," Fulbright Briefing, June 16, 2011 • Co-author, "U.K. House of Commons Committee Urges Support for Shale Gas Extraction," Fulbright Briefing, June 6, 2011 • Co-author, "Duke University Releases Study Reporting Methane Contamination in Areas of Natural Gas Extraction," Fulbright Briefing, May 11, 2011 • Co-author, "FracFocus Website Launched As Hydraulic Fracturing Chemical Disclosure Registry," Fulbright Alert - Shale and Hydraulic Fracturing Task Force, April 12, 2011 • Co-author, "Texas Supreme Court Defers to Railroad Commission's Interpretation of 'Public Interest' in Injection Well Permit Decisions," Fulbright Briefing, March 28, 2011 • "Fracking and the Courts," Oil and Gas Investor, July 2010 • Harris County Bench Book − Editor in Chief, 2007 − Editor, 2004 - 2006 • Contributing Writer, Property Loss Research Bureau, (PLRB/LIRB) First Party Litigation Manual, 2006 • Contributing Writer, Property Loss Research Bureau, (PLRB/LIRB), Claims Conference & Insurance Service Expo, 2004 • Co-author, The Fourteen Points: How to Prepare for Deposition or Trial Testimony in First Party Insurance Litigation, American Bar Association Annual Meeting, New York City, 2002

Speeches Barclay has given speeches on various topics at seminars and conventions as well as in the continuing legal education setting. Barclay has also given in-house presentations to oil and gas companies, construction companies and insurance companies in Houston, New York, London and Chicago on a number of topics including electronic discovery and attorney-client privilege issues in major companies. • Conference Co-Chair, 3rd Annual Hydraulic Fracking Seminar, Bacara Resort & Spa - Santa Barbara, California, February 27 - 28, 2014 • "Hydraulic Fracturing: The Hypes and Realities," Clean Frac'ing Conference, Houston, Texas, February 17-18, 2014 • "Harnessing Domestic Shale Play Opportunities," American Leaders Minimizing Risks in Upstream Oil abd Gas Contract Management, Houston, Texas, February 11-12, 2014 • Presenter and Participant, "US/Colombia Cooperation on Coal Bed Methane Extraction and Unconventional Resources," U.S. Commerce Department Commercial Development Law Program,Colombia Ministry of Mines and Energy, Bogota, Colombia, January 20-23, 2014 • "Update on the Conflict Over Hydraulic Fracturing and Best Practices for Minimizing Surface and Groundwater Impacts," Tribal Energy in the Southwest, Sandia Resort & Casino, Albuquerque, New Mexico, December 9 & 10, 2013 • "Damages in the Shale Business: Anything Different form the Usual Oil and Gas Dispute?" 4th Annual Institute for Energy Law and International Bar Association's Section on Energy, Environment, Natural Resources International Oil & Gas Law Conference, London, England, December 4-6, 2013 • "To Drink or Not to Drink? Water Use and Disposal Issues in Hydraulic Fracturing," 2013 AICPA/PDI National Oil and Gas Conference, Denver, Colorado, November 13-15, 2013 • "Ten Things Everybody Should Know About an Oil & Gas Lease," National Oil & Gas Royalty Conference, Houston, Texas, October 22, 2013 • "Hydraulic Fracturing: The Hype and The Realities: A Look at the Regulations and the Lawsuits," 2013 Clean Fracking Communication & Technology Conference, Beaver Creek, Colorado, October 8-9, 2013 • "Reducing Risk in Oil and Gas Development," Oil & Gas Development in Montana, Billings, Montana, October 2, 2013 • Co-presenter, "Fracking: Water Rights, Water Quality, Where/How to Get a Secure Water Supply, Insuring Fracking Operations, Liability Issues, and Environmental Issues," 13th Annual Montana Water Law, Helena, Montana, September 17-18, 2013 • "Fracking Updates," ExxonMobil Global Litigation Retreat, Austin, Texas September 16, 2013 • "Fracturing -- The Hype and the Realities: A Look at Regulations and Lawsuits," 26th Annual Energy Law Institute for Attorneys and Landmen, South Texas College of Law, with AIPN, AAPL, HAPL, Houston, Texas, August 28-29, 2013 • "Hydraulic Fracturing: Risks in Water Quality and Supply," Lorman Audio Conference, August 21, 2013 • "What's Fracking in the Courts? A Review of Hydraulic Fracturing Cases and Litigation Strategy," Review of Oil & Gas Law XXVIII - Dallas Bar Association Energy Law Section, Dallas, Texas July 18- 19, 2013 • Presenter and Participant U.S. - Afghanistan Cooperation on Extractive Industries Development Program, U.S. Department of Commerce Commercial Law Development Program, Doha, Qatar, June 25 - July 2, 2013 • "Recent Developments in Hydraulic Fracturing," 22 Annual Beach and Bar Symposium - Environmental Hot Topics 2013, Sandestin, Florida June 13-16, 2013 • Co-chair and presenter, "Hydraulic Fracturing Litigation: What's Happening in the Courts," 2nd Hydraulic Fracturing Conference, Houston, Texas, June 14, 2013 • "What the Frac Is Frac'ing? Its Impact and Legal Issues," Houston Association of Legal Professionals, Houston, Texas, June 11, 2013 • Co-chair, Institute for Energy Law's 4th Law of Shale Plays Conference, Fort Worth, Texas, June 6-7, 2013 • "Update on Hydraulic Fracturing Regulations and Litigation," Executive meeting Mountain States Legal Foundation, Denver, Colorado, June 5, 2013 • "Preparing for the Future: How Acting Now – In Advance of Regulation – Will Benefit Workers and Limit Future Liability," 3rd Proppants Summit, Houston, Texas, May 22, 2013 • "Hydraulic Fracturing Litigation: Risks and Rewards," ABA Chemical Products and Toxic Tort Regional Meeting, New York, New York, May 13, 2013 • "What the Frac Is Frac'ing? Its Impact and Legal Issues," Houston Paralegal Association, Galveston, Texas May 3, 2013 • Hydraulic Fracturing Conference, The Seminar Group, Bacara Resort & Spa, Santa Monica, California, February 8, 2013 • Presenter and Participant, "US/Chile Cooperation on Unconventional Natural Gas," U.S. Commerce Department Commercial Development Law Program, Chile Ministry of Energy, Santiago, Chile, January 27-29, 2013 • Interviewed by National Public Radio, "Tracing the Culprit if Fracking Pollutes Water Supplies," January 22, 2013 • "Dealing with Community Challenges," Permian Basin Infrastructure & Development Summit, Dallas, Texas, January 14-16, 2013 • "Investment Opportunities in the Proppants Value Chain," 2nd Proppants Summit, Houston, Texas, December 4-6, 2013 • "User's Perspectives," 2nd Proppants Summit, Houston, Texas, December 4-6, 2012 • "State and Local Regulations," CLE Austin Hydraulic Fracturing Conference, Austin, Texas, November 30, 2012 • "Current Issues in Hydraulic Fracturing," Lorman Audio Conference, Internet, November 13, 2012 • Presenter and Participant, "US/India Cooperation on Unconventional Natural Gas," U.S. State Department Bureau of Energy and U.S. Department of Commerce Commercial Development Law Program, India Ministry of Petroleum & Natural Gas, New Delhi, India, November 5-6, 2012 • "Hydraulic Fracturing," ABA Toxic Tort Committee, Mass Tort, New York, New York, October 29, 2012 • "The Exploration, Development and Production of Natural Gas by Hydraulic Fracturing," Unconventional Gas Seminar with Bennett Jones LLP, Toronto, Canada, October 23, 2012 • "Where New Hydraulic Fracturing Techniques in Various Shale Plays Embrace New Regulations," Texas Alliance of Energy Producers, October 17-18, 2012 • "Water Trading Markets for Oil and Gas," Water & Energy Upstream Supply & Demand Management Strategies, Houston, Texas, October 4-5, 2012 • "Overview of Current Developments Concerning Shale Gas and Hydraulic Fracturing," HAPL (Houston Association of Professional Landmen), Houston, Texas October 4, 2012 • "Overview of Current Developments Concerning Shale Gas and Hydraulic Fracturing," HalfMoon Seminars, Houston, Texas, September 20, 2012 • "Hydraulic Fracturing Litigation," In-House Presentation to ExxonMobil, Houston, Texas September 11, 2012 • "Fracking – Rules and Regulations," 25th Energy Law Institute for Attorneys and Landmen Co- Sponsored with AAPL (American Association of Professional Landmen), AIPN (Association of International Petroleum Negotiators), HAPL (Houston Association of Professional Landmen), South Texas College of Law, Houston, Texas August 29-30, 2012 • "Hydraulic Fracturing Litigation," In-House Presentation to ExxonMobil, Fairfax, Virginia August 22, 2012 • "Hydraulic Fracturing: What Is It and Why Should You Care?" 20th Anniversary Conference on Arizona Water Law, Biltmore Resort & Spa, Phoenix, Arizona, August 9-10, 2012 • "Water Pollution and Disposal Issues Related to Hydraulic Fracturing," Institute for Energy Law Conference on Shale Gas, Ft. Worth, Texas, June 6-7, 2012 • Conference Co-Chair and Speaker, "Federal and State Update on Hydraulic Fracturing," Water Law Institute Conference on Hydraulic Fracturing Environmental Quality and America's Energy Future, St. Regis Hotel, Houston, Texas, June 7-8, 2012 • "Hydraulic Fracturing: An Update on the Issues," Houston Bar Association Oil, Gas & Mineral Law Section, Houston, Texas, May 22, 2012 • "What Estate Planners Need to Know About Oil and Gas Leasing," Amarillo Area Estate Planning Council, Twenty-First Annual Institute on Estate Planning, Amarillo College of Business & Industry, May 3-4, 2012 • "Hydraulic Fracturing – Are the Regulators Coming or Not?" Young Professionals in Energy International Summit, Las Vegas, Nevada, April 23-25, 2012 • "Hydraulic Fracturing on Trial: Possibilities, Pollution, and Preemption," Plenary Session of 41st Annual American Bar Association Conference on Environmental Law, Salt Lake City, Utah, March 22-24, 2012 • "Hydraulic Fracking and Other Current Issues Impacting Oil & Gas Leases," 2012 Oil & Gas Conference of Texas Bankers Association, San Antonio, Texas, March 8-9, 2012 • "Preparing for Your Deposition," 13th Annual Windstorm Insurance Conference, Orlando, Florida, January 30-February 2, 2012 • "Hydraulic Fracturing and Shale Gas Update," Breakfast Club of Houston, January 11, 2012 • "Oil and Gas Leasing Disputes & Solutions: Best Practices for Avoiding Common Issues Arising from Hydraulic Fracturing (Fracking) Extraction Agreements," LexisNexis® Webinar, December 20, 2011 • "Shale Gas Plays: The Hotbeds," Gas Drilling Operations Conference, HB Litigation Conference, Dallas, Texas, December 13, 2011 • Program Chair and Speech, "Litigation Arising from Various Lease Contacts and Oil and Gas Related Contracts," 13th Annual Energy Contract Management in Oil and Gas, Houston, Texas, December 5-6, 2011 • "Ten Things Everyone Should Know About a Current Oil & Gas Lease," Society of Louisiana Certified Public Accountants Oil & Gas Workshop, Lafayette, Louisiana, November 29-30, 2011 • "Water Issues in Oil and Gas Development: Fracking and Wastewater Disposal Issues," The Second Annual Conference on Tribal Water Law, Las Vegas, Nevada, October 27-28, 2011 • "EPA Announces Plans to Regulate 'Fracking'," Marketplace - American Public Media Radio Interview by Scott Tong, October 21, 2011 • "Next Generation Project Texas Energy Seminar," The Robert S. Strauss Center for International Security and Law, The University of Texas at Austin, October 20-21, 2011 • "Shale Gas: the Plays and the Playing Field," Fulbright Seminar, New York, New York, October 18, 2011 • "Ten Things Everybody Should Know About an Oil and Gas Lease," National Oil & Gas Royalty Conference, Houston, Texas, October 17, 2011 • "Overview of Fracking Law: a U.S. Perspective," Fraser Milner Casgrain Fracking Seminar, Calgary, Alberta, October 12, 2011 • "Fracking – Are the Regulators Coming or Not? A Review of the State of the Industry," 57th Annual Rocky Mountain Mineral Law Institute, Santa Fe, New Mexico, July 21-23, 2011 • "Shale Gas: the Plays and the Playing Field. The Transactional, Regulatory and Litigation Landscape," Fulbright & Jaworski Breakfast Seminar, The Houstonian Hotel, June 23, 2011 • "Hydraulic Fracking: An Overview of the Issues," Fulbright Forum: Trends in Energy Disputes 2011, June 7, 2011 • "Gulf Oil Spill: Developments & Economic Losses for Claims," Property Loss Research Bureau, 2011 Claims Conference, Nashville, Tennessee, April 3-6, 2011 • "Case Law Update on Bad Faith Topics from Texas, Louisiana, Mississippi and Florida," 12th Annual Windstorm Insurance Conference, Houston, Texas, January 24-27, 2011 • "Effective Depositions," presented at request of client, Vancouver, B.C., May 7, 2009 • "Update on Texas Bad Faith Law," presented to client group attending State Bar of Texas Annual Meeting, Houston, Texas, June 26, 2008 • "Litigation Update on Construction Matters," presented to a break out group attending 21st Annual Construction Law Conference, San Antonio, Texas, February 28, 2008 • "Construction Contracts Short Course for Board Members and Administrators," Texas Association of School Boards/Texas Association of School Administrators, Dallas, Texas, September 30, 2007 • "The Fourteen Points on How to Properly Prepare for Deposition," presented at request of client, Chicago, Illinois, September 20, 2007 • "Update on Recent Developments in Texas Regarding Construction Contracts," presented at request of client, Vancouver, B.C., March 13, 2007 Educational Background 1999 - J.D., magna cum laude, University of Houston 1995 - B.A., honors, The University of Texas While in law school Barclay was Associate Editor of the Houston Law Review. He was also selected to be a member of the Order of the Coif and is also a member of the Order of the Barons. He is licensed to practice law in the State of Texas, the State of New York, the State of Colorado, and in the United States District Courts for the Southern, Northern, Western and Eastern Districts of Texas, and for Eastern and Western Districts of Arkansas, as well as the Fifth Circuit Court of Appeals.

Interests In his time away from the office, Barclay enjoys spending time with his wife and their son. As a native Houstonian, he enjoys all outdoor activities. He especially enjoys bird hunting and fishing in Texas and Louisiana. Barclay is also an avid UT football fan and tries to make as many UT games as possible. Barclay is an amateur cook and wine collector and enjoys going out to eat and spending time with his friends and family.

Civic Involvement Barclay happily serves as a Wish Grantor for the Make-A-Wish Foundation. In this capacity he tries to help pool resources to grant special requests or "wishes" to children with life threatening illnesses. Also, he is active with the Hobby Center and its Broadway Across America series and with Houston's Theater Under the Stars. Barclay also serves on the firm's pro bono committee and leads the firm's participation in the Houston Bar Association's Veterans Clinic. During these monthly clinics, held at the Houston VA Hospital, lawyers assist veterans with various legal issues on a pro bono basis. Because of these, and other efforts, for 2014, and indeed for the last 14 consecutive years, Fulbright has been chosen as the Outstanding Large Firm Contribution to the Houston Volunteer Lawyers Program. Barclay is also a member of the Rotary Club of West U and is a Paul Harris Fellow. Barclay also serves as a member of the University of Texas Forty Acres Society, a group dedicated to giving four-year, full-ride merit based scholarships to the University of Texas. Norton Rose Fulbright

Norton Rose Fulbright is a global legal practice. We provide the world’s pre-eminent corporations and ʸ nancial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: ʸ nancial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our oʺ ces and to maintain that level of quality at every point of contact.

Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members (‘the Norton Rose Fulbright members’) of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.

References to ‘Norton Rose Fulbright’, ‘the law ʸ rm’, and ‘legal practice’ are to one or more of the Norton Rose Fulbright members or to one of their respective aʺ liates (together ‘Norton Rose Fulbright entity/entities’). Save that exclusively for the purposes of compliance with US bar rules, where James W. Repass will be responsible for the content of this publication, no individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a ‘partner’) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualiʸ cations of the relevant Norton Rose Fulbright entity. The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take speciʸ c legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright. Law around the world nortonrosefulbright.com

© Norton Rose Fulbright >>Fulbright & Jaworski LLP<< 11/13 (US/mo) Extracts may be copied provided their source is acknowledged.

Erin McDowell, Division Counsel, Range Resources – Appalachia, LLC

Erin earned her undergraduate degree from Bucknell University and majored in Economics and Environmental Studies. She then attended the University Pittsburgh School of Law, graduating in 2004, and went on to work at the law firm Eckert Seamans Cherin & Mellott, which is headquartered in downtown Pittsburgh.

Erin’s ten years of private practice focused primarily on environmental compliance and litigation matters with a particular focus on the oil and gas industry. In January of this year, Erin joined Range as the third member of Range’s legal team, and serves as Division Counsel for all operations in Pennsylvania.

Cory Executive Vice President, General Counsel and Secretary, Bromley MarkWest Energy Partners, L.P.

MarkWest Energy’s general counsel has had a noteworthy 35 year engineering and legal career. Mr. Bromley has established a solid reputation of leadership and professionalism and a record of creating value with several major U.S. and global companies, including Chicago Bridge & Iron Company/CBI Inc., Cyprus Amax Minerals Company, and most recently at MarkWest Energy Partners, L.P.

Mr. Bromley joined MarkWest Energy Partners, L.P., in September 2004. Mr. Bromley currently serves as MarkWest's Executive Vice President, General Counsel & Secretary, and heads up its Law Department, the Land Department, and the Governmental Affairs team. MarkWest Energy is a publicly traded master limited partnership midstream energy company engaged in the gathering, processing and transportation of natural gas; and the transportation, fractionation and storage of natural gas liquids. For the last eleven years, Mr. Bromley has been an integral part of the executive management team associated with MarkWest's rapid growth through strategic acquisitions and organic projects, from an asset base of approximately $500 million at the end of 2004, to an asset base of approximately $15 Billion in 2015.

Prior to joining MarkWest, Mr. Bromley served as Assistant General Counsel at Foundation Coal Holdings, Inc. f/k/a RAG American Coal Holding, Inc. from 1999 through 2004, and as General Managing Attorney and Sr. Environmental Attorney at Cyprus Amax Minerals Company from 1989 to 1999. Prior to that, Mr. Bromley was in private practice with the law firm Popham, Haik, Schnobrich & Kaufman from 1984 through 1989. Preceding his legal career, Mr. Bromley worked as a structural/design engineer involved in several domestic and international LNG and energy projects with the firms CBI, Inc. and Chicago Bridge & Iron Company.

Mr. Bromley earned his J.D. degree, achieving the Order of St. Ives, from the University of Denver, and his bachelor's degree with honors in Civil Engineering from the University of Wyoming.

LARRY D. CANNON

Mr. Cannon is Chief Administrative Officer, General Counsel and Corporate Secretary of FTS International, the largest independent well completion service company for the oil and gas industry.

Before joining FTS International, he was a corporate securities lawyer at Jones Day in Dallas and at Kirkland & Ellis LLP in Chicago.

Mr. Cannon spent the first 10 years of his career as a Certified Public Accountant with Ernst & Young LLP. He earned a bachelor’s degree in business administration from Baylor University and a Juris Doctor degree from DePaul University College of Law.

David P. Poole, is Senior Vice President – General Counsel and Corporate Secretary of Range Resources Corporation (NYSE:RRC), a Fort Worth, Texas based oil and gas exploration and production company.

David joined Range in June 2008 as its first General Counsel. Prior to joining Range, from May 2004 until March 2008 he was with TXU Corp., serving last as Executive Vice President – Legal, and General Counsel. Prior to joining TXU, Mr. Poole spent 16 years with Hunton & Williams LLP and its predecessor, Worsham, Forsythe & Wooldridge as an associate, partner and managing partner of the Dallas office.

David graduated from Texas Tech University with a B.S. in Petroleum Engineering and received a J.D., magna cum laude, from Texas Tech University School of Law where he was on the Law Review.

Megan J. Batchelor Associate, Labor and Employment

Megan Batchelor represents employers, both as a counselor and litigator, primarily in Texas and the Southwest. Her counseling practice is focused on minimizing the risk of litigation and reducing the liability for employers by providing day-to-day advice on a wide range of employment matters. She advises clients on hiring and firing decisions, EEO matters, enforcement of personnel policies, leave issues, accommodations, drug testing laws, classification of employees and other wage and hour matters, safety regulations and governmental investigations. Megan routinely drafts and reviews personnel t 713.276.5799 policies and employment, non-competition, non-disclosure, separation, release f 713.276.6799 and severance agreements. A significant part of her practice involves advising [email protected] business owners, in-house counsel, and human resources and operations professionals of the risks posed by contemplated actions and providing practical Houston guidance in light of legal considerations. 2000 Wells Fargo Plaza 1000 Louisiana Street Houston, Texas 77002 Megan also maintains an active litigation docket. A considerable part of her t 713.276.5500 litigation practice is in seeking and defending against expedited injunctive relief f 713.276.5555 based on non-competition agreements and trade secret misappropriation. Megan also frequently litigates retaliation, discrimination and wrongful discharge actions Industries before both courts and administrative agencies. She is experienced in managing Energy discovery, drafting pleadings and engaging in motion practice, and conducting Retail legal research. Practices Experience Alternative Dispute Resolution Discrimination and Harassment • Represented an international electronics manufacturer and distributor in a Employee Benefits and $40 million breach of contract and trade secret misappropriation case; Executive Compensation dispute involved state of the art parking guidance equipment Intellectual Property Labor and Employment Professional & Community Non-Competition, Trade Secret and Unfair Competition Professional Affiliations Wage and Hour/Fair Labor Standards Act Counseling and • Member, State Bar of Texas Disputes • Member, Houston Bar Association Workplace Safety/Occupational Safety and Health Administration Admissions Education • Texas State Courts (2009) J.D., Texas Tech University • U.S. District Court for the Southern District of Texas (2012) School of Law, summa cum laude (2009)

Speaking Engagements • Recipient, Regents Scholarship • 03.14.15 • Articles Editor, Texas Tech Protect Your Startup: Avoiding Costly Disputes Law Review (2008-2009) SXSW Interactive Festival • Staff Member, Texas Tech • 05.03.13 Law Review (2007-2008) Navigating the EEOC's Recent Guidance on Arrest and Conviction • Recipient, Outstanding 17th Annual Employment Law Update Conference Article Editors Award, Texas Tech Law Review (2009)

GARDERE WYNNE SEWELL LLP AUSTIN | DALLAS | HOUSTON | MEXICO CITY | gardere.com • Member, Phi Delta Phi Blogs B.A., Rice University, cum laude (2005) • 06.30.14 New Definition of "Spouse" would Expand FMLA Benefits to More Same- • Recognized, President's Sex Married Couples Honor Roll (Spring 2002, Work Knowledge Blog Fall 2002, Spring 2003, • 05.05.11 Spring 2005) New DOJ Guidelines for the Americans with Disabilities Act • President, Baker College Work Knowledge Blog (2003-2004) • Member, Campanile • 01.05.11 Orchestra (2001-2003) Caveat Employer: Beware Texas Courts’ Differing Approaches to Calculating Damages in Misclassification Suits Languages Work Knowledge Blog Italian

News

• 01.05.10 Gardere Adds 10 New Associates in 2010

GARDERE WYNNE SEWELL LLP AUSTIN | DALLAS | HOUSTON | MEXICO CITY | gardere.com Shale Pay Managing The Increased Risk of Wage Issues in the Shale Plays

Rachel Powitzky Steely

Gardere Wynne Sewell LLP

Houston, Texas TABLE OF CONTENTS

I. The Federal Fair Labor Standards Act Overview...... 1 A. Minimum Wage ...... 1 B. Overtime ...... 1

II. Increased Focus and Litigation in the Oil and Gas Industry for “Misclassification”...... 4

III. Determining Independent Contractor Status...... 5 A. Economic Realities Test ...... 6 B. New DOL Administrative Interpretation Sheds Light on the Independent Contractor Analysis ...... 7

IV. Proposed Amendments to the Fair Labor Standards Act Regulations...... 10 A. What the Proposed FLSA Regulations Mean for Employers ...... 12

V. Conclusion ...... 13

i TABLE OF AUTHORITIES

Page(s) CASES

Anani v. CVS RX Services, Inc., 730 F.3d 146 (2nd Cir. 2013) ...... 3

Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042 (5th Cir. 1987) ...... 6

Brock v. Superior Care, Inc., 757 F.2d. 1376 (3d Cir. 1985) ...... 7

Hopkins v. Cornerstone Am., 545 F.3d 338 (5th Cir. 2008) ...... 6

Montoya v. S.C. C.P. Painting Contractors, Inc., 589 F. Supp. 2d 569 (D. Md. 2008)...... 7

Schultz v. Capitol Int’l Sec., Inc., 466 F.3d 298 (4th Cir. 2006) ...... 7

United States v. Silk, 331 U.S. 704 (1947)...... 6

Zannikos v. Oil Inspections (USA) Inc., 605 F. App’x 349 (5th Cir. 2015) ...... 3

OTHER AUTHORITIES

29 U.S.C. § 204...... 1

29 U.S.C § 207...... 1

29 U.S.C. § 213(a)(1)...... 2

29 CFR § 541.100...... 2

29 CFR § 541.200...... 2

29 CFR § 541.300...... 3

29 CFR § 541.601...... 3

29 CFR § 778.104...... 1

29 CFR § 778.105...... 1

ii Administrator’s Interpretation No. 2015-1 ...... 7

Anya Litvak, Oil, Gas Firms Scrutinized to Monitor Labor Practices,THE PITTSBURGH POST-GAZETTE (Aug. 4, 2013, 4:00 AM), http://www.post-gazette.com/ businessnews/2013/08/04/oil-gas-firms-scrutinized-to-monitor-labor- practices/stories/201308040230...... 5

Arnold & Patterson, Department of Labor Releases Proposed FLSA Overtime Rules Changes; Final Rule Expected to Impact Millions, THE NATIONAL LAW REVIEW (June 30, 2015),http://www.natlawreview.com/article/department-labor-releases-proposed- flsa-overtime-rules-changes-final-rule-expected...... 11, 12

Dave Fehling, Feds Target Oil and Gas Industry for Underpaying Workers,STATE IMPACT, (June 24, 2014, 6:30 AM), https://stateimpact.npr.org/texas/2014/06/24/feds- target-oil-gas-industry-for-underpaying workers ...... 4

David Weil, Administrator’s Interpretation No. 2015-1,UNITED STATES DEPARTMENT OF LABOR (August 4, 2015), http://www.dol.gov/whd/workers/Misclassification/AI- 2015_1.htm ...... 3, 8

David Weil, The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who are Misclassified as Independent Contractors,UNITED STATES DEPARTMENT OF LABOR (July 15, 2015), http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm...... 5-6

Fair Labor Standards Act (“FLSA”), UNITED STATES DEPARTMENT OF LABOR, http://www.dol.gov/whd/flsa/(last visited July 15, 2015) ...... 1, 7, 10, 11, 12, 13

Gian-Franco Melendez, Making Sense of the Proposed Overtime Regulation,CRISTAL HANENIN (July 7, 2015, 1:00 PM), http://www.chfloridalaw.com/Blog/2015/July/ Making-Sense-of-the-Proposed-Overtime-Regulation.aspx...... 11

Hass & Rotman, The New FLSA Regulations: What Changed, What Didn’t, What’s Next for Employers, Franczeck Radelet (June 30, 2015), http://www.franczek.com/frontcenter-New_FLSA_ Regulations_2015.html...... 12, 13

Independent Contractor,UNITED STATES Department OF LABOR, (last visited August 4, 2015) ...... 3

Naveena Sadasivam, For Oil and Gas Companies, Rigging Seems to Involve Wages, Too, PROPUBLICA (Sep. 25, 2014, 10:02 AM), http://www.propublica.org/article/for-oil- and-gas-companies-rigging-seems-to-involve-wages-too...... 5

The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who are Misclassified as Independent Contractors, UNITED STATES DEPARTMENT OF LABOR (July 15, 2015), http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm...... 5, 6

iii U.S. Department of Labor Targets the Oil and Gas Industry for Wage-Hour Compliance, VORYS, http://www.vorys.com/publications-1479.html (last visited July 27, 2015)...... 4

iv I. THE FEDERAL FAIR LABOR STANDARDS ACT OVERVIEW

A. Minimum Wage

The federal Fair Labor Standards Act (“FLSA”) is one of the earliest efforts of the federal government to regulate the workplace. Congress first adopted the FLSA in 1938 and has amended it numerous times over the years. The FLSA establishes “minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments.” The Fair Labor Standards Act (FLSA),UNITED

STATES DEPARTMENT OF LABOR, http://www.dol.gov/whd/flsa/(last visited July 15, 2015). It is administered and enforced by the Wage and Hour Division of the Employment Standards

Administration. 29 U.S.C. § 204.

As of 2009, the federal minimum wage is $7.25; however, many states have also enacted minimum wage laws. In cases where an employee is subject to both state and federal minimum wage laws, the employee is entitled to the higher minimum wage. The Fair Labor Standards Act

(FLSA),UNITED STATES DEPARTMENT OF LABOR, (last visited July 15, 2015).

B. Overtime

Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular pay rate. 29

U.S.C. § 207. The Act applies on a workweek basis. An employee’s workweek is a fixed and regularly recurring period of 168 hours—seven consecutive 24-hour periods. 29 CFR § 778.105.

Because overtime requirements focus on the workweek, hours cannot be averaged between workweeks. Thus, if an employee works 38 hours one week and 42 hours the next week, the employer must pay overtime for two hours in the second week even though the average number of hours worked during the two-week period is 40. 29 CFR § 778.104.

1 The most commonly used exemptions, referred to as the “white-collar” exemptions, apply to employees working in a “bona fide executive, administrative, or professional capacity.”

29 U.S.C. § 213(a)(1). To qualify for these exemptions, the employee must satisfy certain job duties tests and receive a minimum weekly salary.

According to the DOL, to qualify for the executive employee exemption the employee must: (1) be compensated on a salary basis at a rate not less than $455 per week; (2) be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; (3) customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and (4) have the authority to hire or fire the employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight. 29 CFR

§ 541.100 Wage and Hour Division (WHD),UNITED STATES DEPARTMENT OF LABOR, (last visited August 25, 2015).

To qualify for the administrative exemption, the employee must: (1) be compensated on a salary or fee basis at a rate not less than $455 per week; (2) perform office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and (3) include the exercise of discretion and independent judgment with respect to matters of significance. 29 CFR § 541.200.

The professional capacity exemption requires the employee must: (1) be compensated on a salary or fee basis at a rated not less than $455 per week; and (2) perform work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment. Furthermore,

2 the advanced knowledge must be in a field of science or learning and must be customarily acquired by a prolonged course of specialized intellectual instruction. 29 CFR § 541.300.

One of the most underutilized exemptions is the highly compensated employee exemption (“HCE”). A HCE earns at least $100,000 a year, exclusive or board or other guaranteed compensation, and customarily and regularly performs one or more of the exempt duties or responsibilities of an executive, administrative or professional employee. 29 CFR

§ 541.601. Because the employee is a high wage earner, a “relaxed” standard is applied to determine whether the employee meets the minimum burden under the white collar exemption duties standards. Id. Courts analyzing the HCE view it as a “safe harbor” for employers. Anani v. CVS RX Services, Inc., 730 F.3d 146 (2nd Cir. 2013); Zannikos v. Oil Inspections (USA) Inc.,

605 F. App’x 349 (5th Cir. 2015) (finding a class of “marine superintendents,” whose duties included, but were not limited to, “observing oil transfers to verify that performance was accurate, legal, and safe,” and “monitor[ing] and report[ing] on transfers’ compliance with Oil

Inspections’ safety policies and nationally recognized safety standards” exempt as highly compensated employees even though their duties primarily involved completing a checklist of activities performed by subcontractors).

In contrast, the DOL does not have a specific definition for an independent contractor aside from “one who engages in a business of his own.” Independent Contractor,UNITED

STATES Department OF LABOR, (last visited August 4, 2015). Thus, the problem becomes when an independent contractor starts to look more like an employee. And recently, the DOL has declared that, in their opinion, almost all individuals working for a company are “employees” unless they show otherwise. David Weil, Administrator’s Interpretation No. 2015-1,UNITED

3 STATES DEPARTMENT OF LABOR (August 4, 2015), http://www.dol.gov/whd/workers/

Misclassification/AI-2015_1.htm.

II. INCREASED FOCUS AND LITIGATION IN THE OIL AND GAS INDUSTRY FOR “MISCLASSIFICATION”

The DOL and plaintiffs lawyers have targeted the oil and gas industry for over five years.

At first, many companies relied on the historical treatment of workers’ categories as a defense to claims of overtime and independent contractor status. The courts quickly dispensed with any notion that historical treatment of workers would serve as an excuse or defense for improperly paying employees. As an example of the focused efforts, the DOL has collected back pay for over 4,000 energy industry workers in the last few years in states with the most oil and gas drilling, including Texas, Oklahoma and North Dakota. Dave Fehling, Feds Target Oil and Gas

Industry for Underpaying Workers,STATE IMPACT, (June 24, 2014, 6:30 AM), https://stateimpact.npr.org/texas/2014/06/24/feds-target-oil-gas-industry-for-underpaying workers. Back pay for these workers reached nearly $6.7 million, accounting for a third of all such settlements by all types of industries nationwide. Id.

In December 2014, the DOL announced that employers engaged in natural gas extraction in the Marcellus Shale region of Pennsylvania and West Virginia agreed to pay $4,498,547 in back wages to 5,310 employees. U.S. Department of Labor Targets the Oil and Gas Industry for

Wage-Hour Compliance, VORYS, http://www.vorys.com/publications-1479.html (last visited

July 27, 2015). In both cases, the DOL found violations of improper payment of overtime, including failure to include production bonuses in the regular rate of pay. Id. The DOL further found that salaried employees had been “misclassified” as exempt, hourly employees had not been paid for the off-the-clock work, and in some cases, employees had been paid a flat rate

4 without regard to the number of hours worked. Id. Thus, one of the main issues the oil and gas industry is facing is the use of independent contractors and whether they are considered employees. Id.

III. DETERMINING INDEPENDENT CONTRACTOR STATUS

The Department of Labor (“DOL”), Internal Revenue Service (“IRS”), the Equal

Employment Opportunity Commission (“EEOC”), and most recently, the National Labor

Relations Board (“NLRB”), will investigate and often challenge a company’s classification that a worker is an independent contractor instead of an employee. Id. According to the John

DuMont, district director for the DOL’s Pittsburgh office, oil and gas firms tend to improperly label their workers as independent contractors, which allows the companies to avoid paying overtime. Anya Litvak, Oil, Gas Firms Scrutinized to Monitor Labor Practices,THE

PITTSBURGH POST-GAZETTE (Aug. 4, 2013, 4:00 AM), http://www.post- gazette.com/businessnews/2013/08/04/oil-gas-firms-scrutinized-to-monitor-labor- practices/stories/201308040230. “The technique, investigators and experts say, has become ever more common as small companies seek to gain contracts in an intensely competitive market by holding labor costs down.” Naveena Sadasivam, For Oil and Gas Companies, Rigging Seems to

Involve Wages, Too,PROPUBLICA (Sep. 25, 2014, 10:02 AM), http://www.propublica.org/article/for-oil-and-gas-companies-rigging-seems-to-involve-wages- too.

The theory underlying the focus on independent contractors is the belief that when employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and worker’s compensation. David Weil, The Application of the Fair

5 Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who are

Misclassified as Independent Contractors,UNITED STATES DEPARTMENT OF LABOR (July 15,

2015), http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm. Moreover, the DOL contends that misclassification results in “lower tax revenues for government and uneven playing field for employers who properly classify their workers.” Id.

A. Economic Realities Test

To determine whether a person is considered an employee or an independent contractor, the DOL and the IRS use entirely different tests. The DOL does not focus on whether the employee is under the “control” of a particular company, but instead on the “economic realities” of the working relationship. United States v. Silk, 331 U.S. 704 (1947). Simply put, if an individual works primarily for one company, the DOL will likely consider the individual an employee.

The five part test looks at: (1) the degree of control exercised by the alleged employer;

(2) the extent of the relative investments of the putative employee and employer; (3) the degree to which the ‘employee’s’ opportunity for profit and loss is determined by the ‘employer;’ (4) the skill and initiative required in performing the job; and (5) the permanency of the relationship.

Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042, 1043 (5th Cir. 1987). In addition, courts “focus on whether, as a matter of economic reality, the worker is economically dependent upon the alleged employer or is instead in business for himself.” Hopkins v. Cornerstone Am., 545 F.3d

338, 343 (5th Cir. 2008).

It is the company’s obligation to prove that the worker was independent from the company. In 2010, the DOL issued a notice of proposed rulemaking indicating that it will amend its recordkeeping requirements to require employers to conduct an analysis of any

6 position for which the worker is not counted as an employee, showing that under the economic reality test, the worker is not in the company’s employment. In addition, the company will have to show that it informed each such worker of its analysis and of the worker’s rights under the

FLSA.

When an alleged employer provides “specific direction for how workers, particularly low-skilled workers, are to perform their jobs, courts have weighed the control factor in favor of employee status.” Montoya v. S.C. C.P. Painting Contractors, Inc., 589 F. Supp. 2d 569, 579

(D. Md. 2008). Courts have further held that a provision of written instructions and procedures on how to complete a job also indicates employee status. See Schultz v. Capitol Int’l Sec., Inc.,

466 F.3d 298, 307 (4th Cir. 2006) (finding an eight-page standard operating procedure document outlining job tasks indicative of employee status). Furthermore, supervision does not need to be constant to establish an employee-employer relationship. See Brock v. Superior Care, Inc., 757

F.2d. 1376, 1383-84 (3d Cir. 1985) (“An employer does not need to look over his workers’ shoulders every day in order to exercise control.”).

B. New DOL Administrative Interpretation Sheds Light on the Independent Contractor Analysis

On June 15, 2015, under Administrator’s Interpretation No. 2015-1, the Department of

Labor issued new guidance on the independent contractor relationship. A copy of the guidance is attached. Significantly, the guidance stresses the DOL’s strong viewpoint that independent contractors must not have a long-standing relationship with the employer. In other words, if the independent contractor is primarily employed by a company, then he/she is an employee of that company.

Example 1: A registered nurse who provides skilled nursing care in

nursing homes is listed with Beta Nurse Registry in order to be matched with

7 clients. The registry interviewed the nurse prior to her joining the registry, and

also required the nurse to undergo a multi-day training presented by Beta. Beta

sends the nurse a listing each week with potential clients and requires the nurse to

fill out a form with Beta prior to contacting any clients. Beta also requires that

the nurse adhere to a certain wage range and the nurse cannot provide care during

any weekend hours. The nurse must inform Beta if she is hired by a client and

must contact Beta if she will miss scheduled work with any client. In this

scenario, the degree of control exercised by the registry is indicative of an

employment relationship.

Example 2: In contrast, another registered nurse who provides skilled

nursing care in nursing homes is listed with Jones Nurse Registry in order to be

matched with clients. The registry sends the nurse a listing each week with

potential clients. The nurse is free to call as many or as few potential clients as

she wishes and to work for as many or as few as she wishes; the nurse also

negotiates her own wage rate and schedule with the client. In this scenario, the

degree of control exercised by the registry is not indicative of an employment

relationship.

David Weil, Administrator’s Interpretation No. 2015-1,UNITED STATES DEPARTMENT OF LABOR

(August 4, 2015), http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm.

The Administrator’s Interpretation is not “law,” but will be used as guidance by the courts, particularly when applying the economic realities factors. These factors are explored in the Interpretation in some detail and are analyzed in an inquiry format:

8 (1) Is the Work an Integral Part of the Employee’s Business? Is the work the part of

the primary work of the business, regardless if it is performed full-time, away

from the employer’s premises or by hundreds of individuals?

(2) Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or

Loss? The ability to work more hours and the amount of work available from the

company have nothing to do with profit and loss. Instead, a worker’s decision to

hire others, purchase materials and rent or lease space weigh heavily in the risk

associated with managerial skill that affects profit and loss.

(3) How Does the Worker’s Relative Investment Compare to the Employer’s

Investment? Investing in tools is not necessarily a business investment, especially

if it is to perform particular work for a particular company. For instance, rig

welders investment in equipped trucks was inadequate compared to the hundreds

of thousands of dollars investment by the drilling companies.

(4) Does the Work Performed Require Special Skill and Initiative? The fact that a

worker is skilled, especially if those skills are technical and used to perform the

work, is not necessarily indicative of independent contractor status. More

important are skills associated with running an independent business, such as

initiative and judgment. For instance, a technically skilled carpenter that works

primarily for one company and is told which jobs to perform and materials to use,

is an employee.

(5) Is the Relationship between the Worker and the Employer Permanent or

Indefinite? A worker who is truly in business for him or herself will eschew a

9 permanent or indefinite relationship with an employer and the dependence that

comes with such permanence or indefiniteness.

(6) What is the Nature and Degree of the Employer’s Control? The courts will

analyze the nature and degree of control, not why the company exercised control.

If the nature of the business requires a company to exert control, then the

individuals are employees.

As a result of this standard, the DOL considers most workers employees under the

FLSA’s broad definitions. Id. The very broad definition of employment under the FLSA as to

“suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor. Id. No single factor including control should be overemphasized. Id. Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus an independent contractor) or is economically dependent on the employer (and thus is its employee). Id. The factors should be used as guides to determine economic dependence. Id.

IV. PROPOSED AMENDMENTS TO THE FAIR LABOR STANDARDS ACT REGULATIONS

With one notable exception (the Portal to Portal Act), each of the amendments to the

FLSA in past years have resulted in an expansion of its scope. The 2015 proposed amendment is no exception. On July 6, 2015, the DOL announced a proposed rule that would extend overtime protections to nearly 5 million white collar workers within the first year of its implementation.

The Fair Labor Standards Act (FLSA),UNITED STATES DEPARTMENT OF LABOR. A sixty-day comment period on the proposed regulations expires on September 5, 2015.

10 There are two parts to the proposed amendment: (1) increasing the salary level to an amount equal to the 40th percentile of earnings for full-time salaried workers, and (2) preventing the new salary from becoming outdated by installing a mechanism that would automatically update the salary level on an annual basis either by using a fixed percentile of wages or the consumer price index. Arnold & Patterson, Department of Labor Releases Proposed FLSA

Overtime Rules Changes; Final Rule Expected to Impact Millions. Currently, the salary level threshold, which the DOL updated in 2004, stands at $23,660 per year or $455 per week.

Michael Arnold & George Patterson, Department of Labor Releases Proposed FLSA Overtime

Rules Changes; Final Rule Expected to Impact Millions, THE NATIONAL LAW REVIEW (June 30,

2015),http://www.natlawreview.com/article/department-labor-releases-proposed-flsa-overtime- rules-changes-final-rule-expected. This salary level threshold serves as the best single test of exempt status, and will now double to an equivalent of $50,440.00 or $970 per week in 2016.

Simply put, employers will be required to pay every salaried employee at least $50,440.00 in order to avoid overtime payments, regardless of the white collar exemption that is utilized. In addition, the highly compensated employee exemption would increase from $100,000 per year to approximately $122,148.

The proposed rule from $455 per week to $970 per week would expand the number of people eligible for overtime from about 8% of the salaried workforce to about 40%. Gian-

Franco Melendez, Making Sense of the Proposed Overtime Regulation,CRISTAL HANENIN (July

7, 2015, 1:00 PM), http://www.chfloridalaw.com/Blog/2015/July/Making-Sense-of-the-

Proposed-Overtime-Regulation.aspx. According to the DOL, increasing the salary threshold automatically “will tend to keep employees who spend significant amounts of time on non- exempt duties from becoming exempt simply because their salary increases keep pace with

11 inflation or with the economy generally.” Arnold & Patterson, Department of Labor Releases

Proposed FLSA Overtime Rules Changes; Final Rule Expected to Impact Millions.

A. What the Proposed FLSA Regulations Mean for Employers

The proposed salary level increase to $50,440 is substantial and employers will need to consider the impact that this proposal will have on their bottom line. Doug Hass & Staci

Rotman, The New FLSA Regulations: What Changed, What Didn’t, What’s Next for Employers,

Franczeck Radelet (June 30, 2015), http://www.franczek.com/frontcenter-New_FLSA_

Regulations_2015.html. The Department’s Wage and Hour Division estimates that 10.9 million workers will no longer qualify as exempt based on the new salary level. Thus, “[e]mployers are well-advised to consider an effective communication plan—one that includes a properly tailored message to affected (and possibly unaffected) employees regarding their overtime eligibility, proper timekeeping policies (including regarding the use of electronic devices) and information on whether their pay, work schedule, and other benefits have been affected.” Arnold &

Patterson, Department of Labor Releases Proposed FLSA Overtime Rules Changes; Final Rule

Expected to Impact Millions.

In addition to this proposed change, the DOL is also requesting input on (1) whether nondiscretionary bonuses (which are the most frequently awarded) should be included in calculating the exempt compensation standard; (2) whether the duties test for white collar exemptions should be modified; and, (3) procedures for a mechanism to automatically adjust the yearly and weekly salary standards for the white collar exemptions. Of import is the fact that the

DOL may now issue regulations on these topics even those actual proposed regulations have not been issued, because of the “logical growth” doctrine. Under this doctrine, additional regulatory

12 language may be added to the proposed rules as long as the public has been put on notice that the topic is under consideration.

After the 60-day comment period, the DOL will issue draft final regulations, taking into account the public’s comments. Because the DOL gave employers only 120 days to comply with the 2004 rules, it estimated the DOL will provide the same or shorter period for the 2015 proposed amendment. Hass & Rotman, The New FLSA Regulations: What Changed, What

Didn’t, What’s Next for Employers. As a result, a preliminary audit of exempt positions is necessary as soon as the final regulations are released in order to determine whether they would be impacted by the proposed changes and whether any potential duties test changes could similarly impact things. The exemption audits should be conducted under direction of legal counsel to preserve privilege and avoid creating dangerous discovery for use by plaintiffs’ attorneys.

V. CONCLUSION

Under the FLSA, employers should be aware of their worker’s employment status and the relationship they have with one another. While many employers themselves are not aware they are misclassifying their workers, the DOL has continuously brought successful enforcement actions against those employers. Thus, the employer should look at how much control they have over their worker, including their tasks, schedule, and even dress code.

13

Gardere01 - 6937864v.3 ϴͬϯϭͬϮϬϭϱ

6KDOH3D\6KDOH3D\6KDOH3D\ 0DQDJLQJ7KH,QFUHDVHG5LVN RI:DJH,VVXHVLQWKH6KDOH3OD\V

5DFKHO3RZLW]N\6WHHO\ *$5'(5( :<11( 6(:(// //3

)/6$/LWLJDWLRQ$FWLYLW\LV([WUHPHO\+LJK

• LQFUHDVHVLQFH

• LQFUHDVHLQ\HDUV

• 7H[DVDFWLYLW\LQYV • 6RXWKHUQ'LVWULFWLQFUHDVH  • 1RUWKHUQ'LVWULFWLQFUHDVH • (DVWHUQ'LVWULFWLQFUHDVH • 0DQ\DUHFODVVDFWLRQV

9RU\V

$QGURYHWWGDWDVWXG\'HFHPEHU

ϭ ϴͬϯϭͬϮϬϭϱ

)/6$0DMRU3URYLVLRQV

0LQLPXP:DJH

2YHUWLPH3D\([HPSWLRQV

T

&KLOG/DERU

5HFRUGNHHSLQJ

/LDELOLW\'DPDJHV 3HQDOWLHV

• 3HUVRQDO/LDELOLW\

• 8QSDLG:DJHV

• /LTXLGDWHG'DPDJHV

• $WWRUQH\V¶)HHV

• *RYHUQPHQW2YHUVLJKW

Ϯ ϴͬϯϭͬϮϬϭϱ

2LODQG*DV,QGXVWU\7DUJHWV

7DUJHWHG(QIRUFHPHQW,QLWLDWLYH

³7KHRLODQGJDVLQGXVWU\LVRQHRIWKHPRVWILVVXUHGLQGXVWULHV -REVLWHVWKDWXVHGWREHUXQE\DVLQJOHFRPSDQ\FDQQRZ KDYHGR]HQVRIVPDOOHUFRQWUDFWRUVSHUIRUPLQJZRUNZKLFKFDQ FUHDWHGRZQZDUGHFRQRPLFSUHVVXUHRQORZHUOHYHO VXEFRQWUDFWRUV*LYHQWKHILVVXUHGODQGVFDSHWKLVLVDQ LQGXVWU\ULSHIRUQRQFRPSOLDQFH´

 'HS¶WRI/DERU3UHVV5HOHDVH

ϯ ϴͬϯϭͬϮϬϭϱ

7DUJHWHG(QIRUFHPHQW,QLWLDWLYH

• 6SHFLDO³DUHDVRIIRFXV´IRU'2/LQYHVWLJDWLRQV

• )UDFNLQJ,QGXVWU\,QLWLDWLYHODXQFKHGLQ

• 1RUWKHDVWDQG6RXWKZHVWUHJLRQV • 0RUHWKDQLQYHVWLJDWLRQV • 0RUHWKDQLQXQSDLGZDJHV • 0RUHWKDQLPSDFWHGZRUNHUV

• 0DUFHOOXV6KDOH,QYHVWLJDWLRQ • LQEDFNZDJHVWRHPSOR\HHV

5HVXOWVRIWKH,QLWLDWLYH 

• % '&RQWUDFWLQJ,QF± DQRLOILHOGVWDIILQJFRPSDQ\± SD\VRXW PLOOLRQLQXQSDLGRYHUWLPHIRUZHOGHUVSLSHILWWHUVDQGVKLS ILWWHUVDW*XOI&RDVWIDFLOLWLHVZKRVH³SHUGLHP´SD\PHQWVZHUH GHHPHGWREHZDJHV

• LQEDFNZDJHVIRUPLVFODVVLILHGRSHUDWRUV

• 5HFRUGNHHSLQJDQGPLVFODVVLILFDWLRQRIHPSOR\HHVDVLQGHSHQGHQW FRQWUDFWRUVUHVXOWVLQOLDELOLW\DQGPDQGDWHG'2/WKLUG SDUW\RYHUVLJKWIRU2LO)LHOG6HUYLFHVFRPSDQ\

ϰ ϴͬϯϭͬϮϬϭϱ

&RPPRQ,VVXHVLQWKH2LO3DWFK

• &RQWUDFWRU6WDWXV • 0LVFODVVLILFDWLRQRIHPSOR\HHV

• &R(PSOR\PHQW • .QRZ\RXUVXEFRQWUDFWRUV

• 2YHUWLPH&DOFXODWLRQ • 3URGXFWLRQ%RQXVHV • 6DIHW\%RQXVHV • 3HU'LHP • 2IIWKH&ORFN • 6DODULHG(PSOR\HHV

7DUJHWHG-RE&DWDJRULHV

• )LHOG(QJLQHHUV • 5LJ0DQDJHUV • &DPS0DQDJHUV • )LHOG • 2SHUDWRUV • 0:''ULOOHUV 7HFKQLFLDQV • &UDQH2SHUDWRUV • /:''ULOOHUV • 0XG/RJJLQJ • /LQHPHQ • 'LUHFWLRQDO'ULOOHUV 7HFKQLFLDQV • :HOGHUV • &UDQH2SHUDWRUV • 0XG(QJLQHHUV • 3XPSHUV • *UHDVH2SHUDWRUV • 6XUYH\RUV • 3LSHOLQH • 6ROLGV2SHUDWRUV • 'ULOOHUV ,QVSHFWRUV • &RLO7XELQJ • 5RXJKQHFNV • 7RS'ULYH 2SHUDWRUV • 0RWRUPHQ 7HFKQLFLDQV • 6DQG&RRUGLQDWRUV • 6ZDPSHUV • 0HFKDQLFV

ϱ ϴͬϯϭͬϮϬϭϱ

2YHUWLPH3D\

• 'XHWRFRYHUHGQRQH[HPSW HPSOR\HHV

• &DOFXODWHGDWWLPHDQGRQHKDOI WKHHPSOR\HH¶VUHJXODUUDWHRISD\

• $IWHUKRXUVSHUZRUNZHHN

• :RUNZHHNVPD\QRWEHDYHUDJHG

• 1R³FRPS´WLPH

• 6WDWHVPD\KDYHGLIIHUHQWUXOHV

5HJXODU5DWH 55

• ,WLVDUDWHSHUKRXU

• ,WLVGHWHUPLQHGE\GLYLGLQJWRWDOHDUQLQJVIRUDOOKRXUVZRUNHGLQ DQ\ZRUNZHHNE\WKHWRWDOQXPEHURIKRXUVZRUNHGLQWKHZHHN

• ,WPD\QRWEHOHVVWKDQWKHDSSOLFDEOHPLQLPXPZDJH

• ,WPXVWLQFOXGH – VKLIWGLIIHUHQWLDOV – RQFDOOIHHV – 7LSV – ERQXVHV

ϲ ϴͬϯϭͬϮϬϭϱ

0LVFODVVLILFDWLRQRI (PSOR\HHV

([HPSWRU1RQ([HPSW"

([HPSWLRQV± ³)DLU3D\´

• 7KHPRVWFRPPRQH[HPSWLRQV

• ([HFXWLYHV

• $GPLQLVWUDWLYH 6WDII (PSOR\HHV

• 3URIHVVLRQDOV

• 2XWVLGH6DOHV3HRSOH

• &RPSXWHU3URIHVVLRQDOV

• +LJKO\&RPSHQVDWHG

ϳ ϴͬϯϭͬϮϬϭϱ

([HFXWLYH([HPSWLRQ

• *XDUDQWHHGVDODU\RUIHHEDVHGFRPSHQVDWLRQRIDWOHDVWSHU ZHHNH[FOXVLYHRIERDUGORGJLQJRURWKHUIDFLOLWLHV • EHPDQDJLQJWKHHQWHUSULVHRUPDQDJLQJDFXVWRPDULO\ UHFRJQL]HGGHSDUWPHQWRUVXEGLYLVLRQRIWKHHQWHUSULVH • FXVWRPDULO\DQGUHJXODUO\GLUHFWWKHZRUNRIDWOHDVWWZRRUPRUH RWKHUIXOOWLPHHPSOR\HHV RUWKHLUHTXLYDOHQWDQG • KDYHWKHDXWKRULW\WRKLUHRUILUHWKHHPSOR\HHVRUWKHHPSOR\HH¶V VXJJHVWLRQVDQGUHFRPPHQGDWLRQV DVWRWKHKLULQJILULQJ DGYDQFHPHQWSURPRWLRQRUDQ\RWKHUFKDQJHRIVWDWXVRIRWKHU HPSOR\HHVPXVWEHJLYHQSDUWLFXODUZHLJKW

$GPLQLVWUDWLYH([HPSWLRQ

• *XDUDQWHHGVDODU\RUIHHRIDWOHDVWSHUZHHNH[FOXVLYH RIERDUGORGJLQJRURWKHUIDFLOLWLHV

• 3ULPDU\GXW\LVWKHSHUIRUPDQFHRIRIILFHRUQRQPDQXDOZRUN GLUHFWO\UHODWHGWRWKHPDQDJHPHQWRUJHQHUDOEXVLQHVV RSHUDWLRQVRIWKHHPSOR\HURUWKHHPSOR\HU¶VFXVWRPHUV W\SH RIZRUN± GLUHFWO\UHODWHGWRDVVLVWLQJZLWKWKHUXQQLQJRU VHUYLFLQJRIDEXVLQHVV

• 3ULPDU\GXW\LQFOXGHVZRUNUHTXLULQJWKHH[HUFLVHRIGLVFUHWLRQ DQGLQGHSHQGHQWMXGJPHQW ZLWKUHVSHFWWRPDWWHUVRI VLJQLILFDQFH± IDFWRUWHVW • 'RHVHPSOR\HHKDYHDXWKRULW\WRFRPPLWWKHHPSOR\HUWR PDWWHUVRIVLJQLILFDQWILQDQFLDOLPSDFW" • 'RHVHPSOR\HHKDYHDXWKRULW\WRGHYLDWHIURPVWDQGDUG SROLFLHV" • 'RHVHPSOR\HHLQYHVWLJDWHDQGUHSUHVHQWPDQDJHPHQWLQ KDQGOLQJFRPSODLQWV"

ϴ ϴͬϯϭͬϮϬϭϱ

+LJKO\&RPSHQVDWHG(PSOR\HH ³+&(´

7KHEHVWEHWIRUKLJKO\SDLGRLOILHOGZRUNHUV

‰ (DUQVDWOHDVWND\HDU H[FOXVLYHRIERDUGRU RWKHUJXDUDQWHHG FRPSHQVDWLRQ 

‰ &XVWRPDULO\SHUIRUPVRQHRUPRUHH[HPSWGXWLHV RIDQH[HFXWLYHDGPLQLVWUDWLYHRUSURIHVVLRQDO HPSOR\HH

$³UHOD[HG´DQDO\VLVLVDSSOLHGWRDQ\HPSOR\HHSDLG RYHUWKLVWKUHVKROG

$UH\RXWHOOLQJPH«

• 7KHLQGXVWU\WUHDWVHYHU\RQHLQWKLVMREWKHVDPH"

• 7KHVHJX\VDUHPDNLQJD\HDU$QGWKH\DUH XQGHUSDLG"± 0DQXDO/DERU

• 7KH\KDYHDJRRGGHDO$UHWKH\DUHUHDOO\JRLQJWRFRPSODLQ"

• :LWKDOOWKHOD\RIIVZRQ¶WWKH\MXVWEHJODGWRKDYHDMRE"

ϵ ϴͬϯϭͬϮϬϭϱ

&RPPRQ,VVXHVLQWKH2LO3DWFK

• 'D\5DWHV6KLIW5DWHV

• :KHQDSSURSULDWH

• :KDWFDQJRZURQJ

• &RPSHQVDEOH7LPH

• 7UDYHO

• 7UDLQLQJ6DIHW\PHHWLQJV

• *HDULQJXS

-XQH'2/± $GPLQLVWUDWLYH'HFLVLRQRQ ,QGHSHQGHQW&RQWUDFWRU

7KHDVVXPSWLRQLVWKDWDOOZRUNHUVDUHFRQVLGHUHGHPSOR\HHV XQOHVVWKH\PHHWWKH(FRQRPLF5HDOLWLHV7HVW

ƒ )RUDFRQVWUXFWLRQFRPSDQ\WKDWIUDPHVUHVLGHQWLDOKRXVHV FDUSHQWHUVDUHDQLQWHJUDOSDUWRIWKHEXVLQHVVEHFDXVHWKH FRPSDQ\LVLQWKHEXVLQHVVWRIUDPHKRPHV

ƒ ,QFRQWUDVWWKHVDPHFRQVWUXFWLRQFRPSDQ\PD\FRQWUDFWZLWK DVRIWZDUHGHYHORSHUWKDWDVVLVWVWKHFRPSDQ\LQWDNLQJELGV VFKHGXOLQJFUHZVDQGWUDFNLQJPDWHULDORUGHUV7KHVRIWZDUH FRPSDQ\LVDQLQGHSHQGHQWFRQWUDFWRU

ϭϬ ϴͬϯϭͬϮϬϭϱ

(FRQRPLF5HDOLWLHV7HVW

• 'HJUHHRIFRQWURO

• ,QYHVWPHQWRIHPSOR\HHDQGHPSOR\HU

• (PSOR\HH¶VRSSRUWXQLW\IRUSURILWORVV

• 6NLOODQGLQLWLDWLYHRIWKHMRE

• 3HUPDQHQF\RIUHODWLRQVKLS

'2/3URSRVHG1HZ5HJXODWLRQV

• 'RXEOHVZHHNO\VDODU\IRUH[HPSWLRQ

•   XSIURP DQG

• ZHHNWRZHHN

• +&(± FKDQJHIURPNWRN

• $XWRPDWLFPHFKDQLVPWRLQFUHDVHZDJHV \HDUO\

ϭϭ ϴͬϯϭͬϮϬϭϱ

'2/3URSRVHG1HZ5HJXODWLRQV

'2/LVVHHNLQJFRPPHQWDU\RQRWKHULVVXHVWKDWFRXOGEHUHYLVHGLQ 

 ZKHWKHUQRQGLVFUHWLRQDU\ERQXVHV ZKLFKDUHWKHPRVW IUHTXHQWO\DZDUGHG VKRXOGEHLQFOXGHGLQFDOFXODWLQJWKH H[HPSWFRPSHQVDWLRQVWDQGDUG

 ZKHWKHUWKHGXWLHVWHVWIRUZKLWHFROODUH[HPSWLRQVVKRXOG EHPRGLILHGDQG

 SURFHGXUHVIRUDPHFKDQLVPWRDXWRPDWLFDOO\DGMXVWWKH \HDUO\DQGZHHNO\VDODU\VWDQGDUGVIRUWKHZKLWHFROODU H[HPSWLRQV

&ROOHFWLYH$FWLRQ,VVXHV

• )/6$FDVHVDUHIUHTXHQWO\ILOHGDVDFROOHFWLYHDFWLRQ • 7KHDIIHFWHGHPSOR\HHVEDQGWRJHWKHU • 5HSUHVHQWHGE\VLQJOHFRXQVHO

• 'DPDJHVPXOWLSO\TXLFNO\ • WRHPSOR\HH • WRHPSOR\HHV

ϭϮ ϴͬϯϭͬϮϬϭϱ

'DPDJHV 3HQDOWLHV

• 8QSDLG:DJHV

• /LTXLGDWHG'DPDJHV± 'RXEOH'DPDJHV

• $WWRUQH\V¶IHHV

• *RYHUQPHQWRYHUVLJKW

:KDWFDQ\RXGR"

• $XGLW\RXUH[HPSWLRQFODVVLILFDWLRQVZLWKFRXQVHO

• &RQILUP\RXUFRQWUDFWRUVWDWXVZLWKFRXQVHO

• 0RQLWRU\RXUVXEFRQWUDFWRUV

• 'RXEOHFKHFNRYHUWLPHFDOFXODWLRQV • ,VHYHU\WKLQJLQFOXGHG"

• 0DQDJH\RXUVXSHUYLVRUV

• %HSURDFWLYH± UHFWLI\HUURUVZKHQIRXQG

ϭϯ ϴͬϯϭͬϮϬϭϱ

:KDWLI\RXJHWVXHG"

• 5HVSRQGLPPHGLDWHO\± GRQ¶WZDLW

• )LJKWWKHFODVV

• :KHQDOOHOVHIDLOV± ILJKWWKHPDWK • 'LIIHUHQWZD\VWRFDOFXODWHGDPDJHV • 'LIIHUHQWODZVLQGLIIHUHQWUHJLRQV

ƒ”†‡”‡›‡‡™‡ŽŽ ƒ Š‡Ž‘™‹–œ›–‡‡Ž›

ʹͲͲͲ‡ŽŽ• ƒ”‰‘Žƒœƒ ͳͲͲͲ‘—‹•‹ƒƒ–”‡‡– ‘—•–‘ǡ‡šƒ•͹͹ͲͲʹǦͷͲͳͳ Š‘‡ǣ͹ͳ͵Ǥʹ͹͸ǤͷͷͲͲ ƒšǣ͹ͳ͵Ǥʹ͹͸Ǧͷͷͷͷ ƒ‹Žǣ”•–‡‡Ž›̷‰ƒ”†‡”‡Ǥ ‘

ϭϰ Kirsten L. Nathanson is a partner in the Environment & Natural Resources Group at Crowell & Moring LLP, focusing on environmental litigation, enforcement defense, risk assessment, and regulatory counseling under the major federal environmental and public lands statutes. She currently serves as a member on the firm's Environment & Natural Resources Group Steering Committee. Her litigation experience encompasses citizen suit defense, regulatory challenges, remediation cost recovery and defense, Administrative Procedure Act actions, and EPA enforcement across nearly all federal environmental laws.

Among her current representative engagements, she is engaged in CERCLA contribution litigation against the United States for a major energy company, represents leading crop protection companies in ESA-FIFRA litigation challenging product registrations, serves as federal environmental counsel to a corporation across multiple facilities and CERCLA sites, and works as Clean Water Act regulatory and litigation counsel to multiple national trade associations.

Kirsten has been recognized as a leading environmental lawyer in Washington, D.C. by Chambers and Partners USA (2013-2015). Her experience includes federal district court motions and trial practice and federal appellate oral arguments. She is admitted to practice before the U.S. Supreme Court and numerous federal appellate and district courts nationwide.

Kirsten currently serves on the Board of the Washington, D.C. Chapter of the Women's Energy Network and was a founding President of the Chapter in 2011-2012. She is a past president and a member of the Board of Trustees of the Energy & Mineral Law Foundation and has also led the Crowell & Moring Women Attorneys' Network. EPA Issues Historic Carbon Regulations for Fossil Fuel-Fired Power Plants Crowell & Moring LLP

On August 3, 2015, the U.S. Environmental Protection Agency (“EPA”) released a package comprising two highly anticipated final rules and one proposed rule regulating carbon dioxide (“CO2”) emissions from the electric power sector. Long touted as a major priority for the

Obama Administration, the rules reflect the Administration's ambitious but untested approach to addressing climate change and mitigating CO2 emissions under section 111 of the Clean Air Act

(the “Act”).

EPA's rulemaking package includes:

x A final rule setting performance standards for new, modified and reconstructed emission

sources under section 111(b) of the Act;

x A final set of performance standards and emission guidelines to reduce carbon pollution

from existing fossil fuel-fired power plants (aka the “Clean Power Plan” or “CPP”)

promulgated under section 111(d) of the Act; and

x A proposed rule seeking comment on proposed “model state rules” together with a

proposed federal plan to enforce the requirements of the CPP in accordance with the final

emission guidelines if states fail to submit their own approvable plans to EPA.

The centerpiece of the package is the EPA’s Clean Power Plan and the accompanying model state rules and federal plan.

If the Clean Power Plan and the other final rules survive judicial review without substantial change, they will significantly alter the way states and utilities design, plan, and operate our bulk power electric grid for decades to come. New Source Performance Standards under Section 111(b)

EPA's final section 111(b) performance standards for new, modified, and reconstructed power plants include significant updates and alterations to the original proposed rule. The technological basis for EPA’s final standards generally mirrors what was relied upon in the proposed rule, including requiring application of partial carbon capture and sequestration

(“CCS”) technology at highly efficient supercritical pulverized coal units. However, EPA’s final standards and their applicability have changed in several significant ways. Some of the most significant differences between the proposed and final rules include:

x For new coal-fired units, EPA has imposed a final emission rate standard of 1,400 lbs

CO2/MWh-gross—a significant upward adjustment from EPA's previously proposed

standard of 1,100 lbs CO2/MWh-gross. This adjustment assumes a reduced rate of carbon

capture at new coal-fired units as compared to the proposed rule, or co-firing without

CCS at integrated gasification combined cycle (“NGCC”) units.

x Standards for modified coal-fired units apply only to sources making modifications that

result in at least a 10 percent increase in hourly emissions. The applicable standards for

such sources have been ratcheted down slightly.

x EPA has eliminated its previous delineation between small and large natural gas-fired

units and has otherwise expanded the applicability of its standards for new and

reconstructed natural gas-fired stationary combustion turbines. Specifically, EPA has set

an emission limit of 1,000 lbs CO2/MWh-gross for all new and reconstructed baseload

natural gas units, while setting separate standards for non-baseload units and multi-fuel-

fired units.

2 x EPA declined to finalize standards for modified natural gas-fired units at this time, both

because it expects that few existing natural gas-fired units will be modified and also out

of concern for the ability of units that modify to achieve EPA's 1,000 lbs CO2/MWh

standard for new and reconstructed units.

EPA’s Clean Power Plan: Major Changes from the Proposed Rule

Under the proposed CPP, EPA based each state’s emission reduction goals on the

Agency’s forecast of the state’s ability to implement four so-called “Building Blocks”: (1) implementing heat rate improvements at individual coal-fired power plants; (2) shifting generation from more carbon-intensive units such as coal-fired electric generating units

(“EGUs”), to lower-emitting natural gas-fired generation; (3) substituting low- and zero-carbon generation (i.e., from under-construction and existing nuclear units, and from renewable resources) for fossil fuel-fired generation; and (4) implementing demand-side energy efficiency measures. States would have been required to submit state plans (or multi-state plans) for achieving required emission reductions by June 2016; interim compliance was required from

2020-2029; and final compliance (i.e., satisfaction of the final rate-based emission goal assigned to each state) was required by 2030.

The final Clean Power Plan maintains much of the original Building Block approach to determining the best system of emission reduction (“BSER”), but also makes substantial modifications to the proposal. BSER now comprises only the first three original Building Blocks, with some refinements. EPA determined that the first three Building Blocks (heat rate improvements, shifts to lower-emitting natural gas generation, and substituting renewable resources for fossil fuel-fired generation) are available to all affected electric generating units

3 through direct investment or through operational shifts, or emissions trading (if the state adopts such programs). EPA adjusted each of the first three Building Blocks in the final rule to include:

x A range of required heat rate improvements (Building Block 1) that varies by region

(from 2.1 to 4.3 percent, instead of the national 6 percent improvement EPA had

proposed);

x Use of 75 percent of summer capacity (rather than 70 percent of nameplate capacity) as

the target capacity factor for existing NGCC units (Building Block 2); and

x A modified approach to quantification of the renewable energy component and

elimination of the proposed rule’s nuclear generation components (Building Block 3).

EPA eliminated Building Block 4, which required emissions reductions through demand- side energy efficiency measures. States are still permitted, however, to use such measures as compliance mechanisms.

EPA also established two alternate representations of its BSER standard: (1) source-level emission performance rates for the two source subcategories—fossil fuel-fired electric utility steam generating units (coal units) and stationary combustion turbines (natural gas units) and (2) state-specific CO2 goals. If states elect the latter approach, they have discretion to achieve their goals through rate- or mass-based regimes.

Other important changes include:

x Responding to concerns about the need for a longer ramp-up period for states and

regulated facilities, EPA has delayed the interim compliance period by two years. Interim

compliance is now required beginning in 2022 rather than in 2020.

x In addition to requiring compliance over a single interim period (2022-2029), EPA has

established three interim compliance periods that a state may choose to use as a “glide

4 path” (2022-2024, 2025-2027, and 2028-2029), each with distinct and increasingly

stringent emission reduction goals. x EPA has extended the deadlines for submitting state plans. Initial plans are due

September 6, 2016, but states submitting plans on that date may apply for, and EPA may

grant, up to a two-year extension for the submission of a final plan, until September 6,

2018—provided the initial plan and request for extension is timely submitted to EPA and

meets other requirements. States that do not timely submit a plan in September 2016 are

likely to be subject to a federal plan. x EPA established uniform, subcategory-specific CO2 emission performance rates: a final

rate of 1,305 lb CO2/MWh for fossil fuel-fired steam generating units (coal plants) and

771 lb/CO2/MWh for stationary combustion turbines (gas plants). x EPA has issued two variations of mass-based goals that a state may implement as

alternatives to achieving compliance through a rate-based regime. One of these

variations would capture new NGCC emissions as part of a so-called “new source

complement.” x The final rule gives states a choice between implementing two types of state plans:

o Under an “emission standards plan,” states are expected to adopt “source-

specific” requirements to ensure achievement of applicable rate-based or mass-

based goals by each affected facility. Affected sources must comply with their

assigned emission performance rates (or applicable mass limits) by taking actions

to reduce their emissions, including heat rate improvements and investments in

renewable and other lower-emitting sources.

5 o Under a “state measures plan,” states can individually or collectively rely on a

broader mix of non-federally enforceable strategies and approaches to achieve an

equivalent amount of emission reductions. These strategies can include the use of

state-enforceable measures on entities other than affected EGUs in conjunction

with any federally enforceable emission standards the state chooses to impose on

affected EGUs. States can therefore employ direct obligations (heat rate

improvements, emission credit trading schemes) as well as reliance on increased

renewable energy portfolio standards and energy efficiency mandates to achieve

emission reductions equivalent to those by application of EPA’s subcategory-

specific performance rates. State measures plans must, however, include “a

backstop of federally enforceable standards” for individual sources that would

apply if the broader mix of state strategies failed to timely achieve required

emission reductions. A state that adopts a state measures approach must use its

mass CO2 emission goal as the metric for demonstrating plan performance. x Based on updated Energy Information Administration data, the final rule has an increased

emphasis on the potential reductions that can be achieved through clean energy

development, but does not significantly increase the projected reductions to be achieved

through shifting to natural gas. The proposed rule was expected to result in a substantial

increase in the use of natural gas, but the final rule focuses more on renewables. x The final rule provides a series of requirements and guidelines that promote renewable

energy deployment more than development of new natural gas-fired generating units. The

White House has said that the final rule will now require 28 percent of all electricity to

come from renewable energy sources, up from 22 percent under the proposed rule.

6 x States now have a greater incentive to promote clean energy development through a new

Clean Energy Incentive Program (“CEIP”). States participating in the CEIP can choose to

“count” certain early actions undertaken prior to the start of the compliance periods, and

to receive credit for associated emission reductions that occur during 2020 and/or 2021.

States can thereafter seek matching awards from EPA of additional allowances or

emission reduction credits for certain eligible projects, up to a total for all states that

represents the equivalent of 300 million short tons of CO2 emissions. EPA is taking

comment on the CEIP in the proposed federal plan rule and will address design and

implementation details of that program in a subsequent action. x To encourage and support rate- or mass-based trading of emission reduction credits and

allowances, the final rule encourages states to devise “trading-ready” plans that will

facilitate interstate trading using common metrics and accounting to avoid the need to

negotiate a formal interstate agreement. EPA’s proposed model state rules further seek to

encourage trading by providing states the option to utilize what appears to be an EPA-

managed trading infrastructure. x To address stakeholder concerns about potential electric reliability impacts, EPA has

included in the final rule a new “reliability safety valve” provision that might permit

reliability-critical generation to operate irrespective of otherwise applicable emission

requirements if there are “unanticipated event or other extraordinary circumstances.” The

final rule also authorizes states to seek state plan revision in the event of “unanticipated

or significant reliability challenges.” EPA indicates, however, that there should be few

circumstances in which this would occur, particularly since state plans are already

required to take reliability into account.

7 Publication of EPA’s final power plant rulemakings in the Federal Register will trigger a

60-day period during which persons aggrieved by the rule can file petitions for judicial review in the United States Court of Appeals for the District of Columbia Circuit. Federal Register publication typically takes a month or more, but it is possible the rules could be published sooner because they are a high priority for this Administration. Numerous legal challenges are anticipated along with motions asking the court to stay the rules pending review.

EPA's Proposed Model State Rule (Federal Plan) and Model Trading Rules

Concurrently with the release of EPA’s final Clean Power Plan, EPA proposed alternative federal trading programs that would be imposed on states that either decline to submit a state plan, or whose proposed state plans do not secure EPA approval: (1) a rate-based emission trading program, and (2) a mass-based emission trading program. EPA believes that either approach would achieve the same level of emissions reductions as that required of an individual state plan and has solicited comment on whether a single approach should be adopted.

EPA will finalize a federal plan for any state that: does not submit either a final approvable plan or an initial plan by September 6, 2016, along with a request for an extension for final plan submittal no later than September 6, 2018; or fails to submit an adequate plan, even if timely submitted.

EPA also proposed model trading rules that states may choose to follow in developing their own plans. EPA has proposed and is seeking comment on a rate-based model trading rule and a mass-based model trading rule for potential use by any state. These would allow for the crediting of a broader set of clean energy resources than is being proposed in the federal plan. Some portions of the model trading rules, such as the evaluation, measurement, and verification procedures, would be acceptable to EPA even if a state otherwise adopted an

8 approach that differs from the federal plan. EPA intends to finalize the rate-based and mass- based model trading rules in summer 2016. EPA intends to finalize federal plans at a later time on a state-by-state basis.

Comments on the proposal will be due 90 days after publication in the Federal Register.

The prepublication versions of EPA’s carbon rulemakings are available online at the following links:

x The Final Clean Power Plan is available here.

x The Standards of Performance for New, Modified, and Reconstructed Utilities is posted

here.

x The proposed federal plan / model trading rule is available here.

Thomas A. Lorenzen Partner – Washington, D.C. Phone: +1 202.624.2789 Email: [email protected]

Larry F. Eisenstat Partner – Washington, D.C. Phone: +1 202.624.2600 Email: [email protected]

Richard Lehfeldt Partner – Washington, D.C. Phone: +1 202.624.2882 Email: [email protected]

Robert Meyers Senior Counsel – Washington, D.C. Phone: +1 202.624.2967 Email: [email protected]

Cameron Prell Counsel – Washington, D.C. Phone: +1 202.624.2611 Email: [email protected]

9 Sherrie A. Armstrong Associate – Washington, D.C. Phone: +1 202.624.2522 Email: [email protected]

Dawn Miller Associate – Washington, D.C. Phone: +1 202.624.2811 Email: [email protected]

10 Something in the Air: Federal Environmental Regulation & Its Impact On Upstream and Midstream Operations

Kirsten Nathanson

Crowell & Moring LLP September 11, 2015 Overview

• Clean Power Plan and impact on natural gas development • Proposed rule to regulate new sources of methane emissions • Proposed rule on aggregation/single source determination

2 Clean Power Plan – What EPA Released

• A set of final Clean Air Act (CAA) rules to regulate carbon dioxide emissions from power plants – A final rule setting performance standards for new, modified, and reconstructed emission sources under CAA section 111(b) – A final rule establishing emission guidelines to reduce carbon dioxide emissions from existing fossil fuel-fired power plants under CAA section 111(d) (Clean Power Plan) – Proposed model state rules and a proposed federal plan

3 Clean Power Plan – Legal Foundation

• Greenhouse gases, including CO2, are pollutants that EPA can regulate under the CAA (decided by Supreme Court in 2007 in Mass. v. EPA, 549 U.S. 497) • EPA made a finding that greenhouse gas concentrations in the atmosphere endanger public health and the environment • CAA section 111(b) – requires EPA to identify categories of stationary sources that cause/contribute to air pollution, and for each source category, EPA must establish “standards of performance” for new sources in the category

4 Clean Power Plan – Legal Foundation (cont’d)

• Standard of performance defined as a standard for emissions that reflects the degree of emission limitation achievable through the application of the “best system of emission reduction” (BSER) that EPA determines has been adequately demonstrated • CAA section 111(d) – EPA must establish procedures for states to submit a plan to establish standards of performance for existing sources; under EPA’s 111(d) regulations, EPA identifies BSER and develops an emission “guideline” for emission reductions achievable through application of BSER; states must be at least as stringent as EPA’s guidelines • How EPA defines BSER drives the minimum stringency of state standards for existing sources

5 Clean Power Plan – Existing Sources – 111(d) Rule • The CPP sets carbon dioxide emissions performance rates for existing power plants that reflect BSER • EPA identified three “building blocks” as BSER and calculated performance rates for coal-fired units and for natural gas combined cycle (NGCC) units – Natural gas-fired stationary combustion turbines: 771 lbs CO2/MWh net 6 Clean Power Plan – Existing Sources – 111(d) Rule (Cont’d) • EPA translated those rates into a state goal – measured in mass and rate – based on each state’s mix of power plants in 2012 • States have the ability to develop their own plans to set forth how they will achieve compliance, using either the subcategory-specific performance rates, the state rate goal, or the state mass goal • States are provided the option of developing an “emissions standards” plan, or a broader “state measures” plan (which must also include a “backstop” of federally enforceable emissions standards)

7 Clean Power Plan – Existing Sources – BSER Building Blocks • The rates that EPA established cannot be met by any existing affected facility through any combination of technological or operational measures at the source • EPA defines BSER to include measures beyond the fenceline – redispatch, investment in renewables, and emission reduction credit trading • Building Block #1 – improved efficiency at coal-fired power plants (equipment upgrades, boiler chemical cleaning, cleaning air preheater coils) • Building Block #2 – shifting generation from higher-emitting coal-fired steam units to lower-emitting natural gas power plants (increase generation at existing NGCC units) – NGCC utilization target set to 75% of summer capacity

8 Clean Power Plan – Existing Sources – BSER Building Blocks (Cont’d) • Building Block #3 – shifting generation to clean energy renewables (increased generation from new renewable generating capacity – solar, wind, etc.) • EPA says that all building blocks are “available to all affected units, either through direct investment or operational shifts or through emissions trading” • Significant legal questions on whether EPA can go beyond the emitting source and the fenceline in defining BSER; will be addressed in upcoming litigation

9 Clean Power Plan – Existing Sources – Timing • State plan due for EPA review by September 6, 2016, with EPA approval/disapproval within 12 months – Extension to September 6, 2018 if adequate initial plan submitted by 2016 deadline • Interim compliance period runs from 2022 – 2029 (extended from 2020 – 2029 in proposed rule) – States may adopt “glidepath” schedule of phased interim standards (2022-2024; 2025-2027; 2028-2029) • Final compliance – all final emission rates and state goals must be met by 2030 – a 32% emission reduction in CO2 compared to 2005 levels

10 Clean Power Plan – New Sources – 111(b) Rule • For new and reconstructed baseload natural gas-fired units, EPA set an emission limit of 1,000 lbs CO2/MWh – separate standards for non-baseload units and multi-fuel-fired units • BSER is efficient NGCC technology for baseload natural gas-fired units, and clean fuels for non-baseload and multi-fuel-fired units • No standards for modified natural gas-fired units – EPA expects that few existing natural gas-fired units will be modified and is concerned for the ability of units that modify to achieve the 1,000 lbs CO2/MWh gross standard for new and reconstructed units

11 Clean Power Plan – Legal Vulnerabilities

• Litigation by some states and industry underway; most expected to launch in October following rule publication • Does EPA have threshold legal authority? • Does the CPP unlawfully displace state regulatory authority? • Does EPA’s BSER determination exceed the Agency’s authority under section 111? • Has EPA properly determined BSER – is it achievable?

12 Clean Power Plan – Impact on Natural Gas

• Final rule is more favorable to renewables over natural gas than proposed rule • Natural gas is still going to play a key role in CPP implementation – Building Block #2 is a core component – Gas shift emission rate credit • The existing source BSER performance rate is more stringent than EPA’s performance standard for new natural-gas fired plants • Natural gas will need to fill the gap before adequate renewable infrastructure is developed 13 Proposed Methane Rule – Background

• According to EPA, methane is a significant GHG emitted in the US from human activities, and is more than 20 times as potent as carbon dioxide • Oil & gas sources comprise one of the largest emitters of methane • 2012 NSPS for VOCs – first federal air standards for hydraulically fractured natural gas wells – Reduction of methane was a co-benefit of the rule • March 2014 – Climate Action Plan: Strategy to Cut Methane Emissions

14 Proposed Methane Rule – Background (Cont’d) • January 2015 – White House’s methane emissions reduction framework for oil & gas sector – Goal of reducing emissions 40-45% below 2012 levels by 2025 – The August 2015 proposed rulemaking is part of the White House framework – First regulation of greenhouse gases under the NSPS program for a sector other than utilities • Same legal foundation as utilities NSPS for carbon dioxide – CAA Section 111

15 Proposed Methane Rule – Regulatory History • In 1979, EPA listed crude oil and natural gas production as a source category for promulgation of NSPS (44 Fed. Reg. 49222) • In 1985, EPA promulgated two NSPS for the oil & gas category that addressed (i) VOC emissions from leaking components at onshore natural gas processing plants and (ii) sulfur dioxide emissions from natural gas processing plants (50 Fed. Reg. 26122; 50 Fed. Reg. 40158) (40 CFR Part 60, Subpart KKK, Subpart LLL) • In 2012, under Section 111(b) authority to review/revise NSPS, EPA promulgated an NSPS that updated the VOC standards for equipment leaks at onshore natural gas processing plants. Also established VOC standards for various operations not covered by Subpart KKK, including gas well completions, centrifugal and reciprocating compressors, pneumatic controllers, and storage vessels (40 CFR Part 60, Subpart OOOO), including amendments in 2013 and 2014 addressing implementation (78 Fed. Reg. 58416; 79 Fed. Reg. 79018)

16 Proposed Methane Rule – Regulatory History (Cont’d) • In August 2015, proposed updates to the NSPS that set methane and VOC requirements for additional new and modified sources in the oil and gas industry – http://www.epa.gov/airquality/oilandgas/pdfs/o g_nsps_pr_081815.pdf -- 60-day comment period upon Federal Register publication • EPA interprets its 1979 category listing to broadly cover all segments of the natural gas industry (production, processing, transmission, storage) 17 Proposed Methane Rule – Summary of Proposed Standards • For some sources covered in proposed rule, there are VOC requirements currently in place under 2012 NSPS that are being expanded to include methane (see summary chart appended to end of slide deck); methane and VOC requirements are being proposed for sources with no current requirements • Proposing to amend Subpart OOOO and create new Subpart OOOOa (Subpart OOOO applies to facilities constructed/modified/reconstructed after Aug. 23, 2011 and before date of publication of 2015 proposed rule; Subpart OOOOa applies to facilities constructed/modified/reconstructed after date of publication of 2015 proposed rule) • Subpart OOOOa would include current VOC requirements in subpart OOOO as well as new provisions in proposed rule

18 Proposed Methane Rule – Summary of Proposed Standards (Cont’d) • BSER for methane is the same as that for VOCs for all emission sources; thus no change to current requirements for sources addressed under 2012 NSPS • Predicate rulemaking for regulating existing sources under 111(d) in the future

19 Proposed Methane Rule – Summary of Proposed Standards – Compressors • EPA did not regulate compressors in the natural gas transmission segment in its 2012 VOC rules; now proposing requirements to control methane and VOCs from two types of compressors • Centrifugal compressors – proposed rule requires a 95% reduction in VOC emissions from compressors with wet seal systems (flaring or routing captured gas back to compressor intake); dry seal systems are not covered by the proposed rule • Reciprocating compressors – proposed rule requires replacement of rod packing systems with two options: every 26,000 hours of operation (monitoring/documenting operating hours) or every 36 months (no documentation of operating hours); alternative to changing rod packing is to route emissions from rod packing via a closed vent system to be reused/recycled by a process or piece of equipment

20 Proposed Methane Rule – Summary of Proposed Standards – Compressors (Cont’d) • Proposed rule includes requirements for initial performance testing, recordkeeping, and annual reporting • Compressors at well sites still excluded • Same standards as those regulated under 2012 NSPS

21 Proposed Methane Rule – Summary of Proposed Standards – Pneumatic Controllers • Expands coverage of 2012 NSPS to transmission and storage sources • Proposal affects continuous bleed, gas-driven controllers (with a gas bleed rate greater than 6 scf/hour) that are located between the wellhead and the point where gas enters the transmission pipeline • For controllers at natural gas compressor stations, the gas bleed limit is 6 scf/hour at an individual controller; low-bleed controllers at compressor stations with bleed rates less than 6 are not subject to the rule • Exceptions for applications requiring high-bleed controllers for certain purposes (operational requirements, safety, etc.) • Requirements for initial performance testing, recordkeeping, and annual reporting 22 Proposed Methane Rule – Summary of Proposed Standards – Pneumatic Pumps • Newly covered source in the 2015 proposed rule • Proposed standards require methane and VOC emissions from new/modified/reconstructed natural gas-driven chemical/methanol pumps and diaphragm pumps to be reduced by 95% if a control device is already available on site (routing emissions from the pump to the existing control device) • Natural gas processing plants have to reach zero emissions, because electricity is widely available at plants to power the pumps

23 Proposed Methane Rule – Summary of Proposed Standards – Well Completions • Expanding 2012 requirements to oil wells – proposing to require owners/operators of hydraulically fractured oil wells to capture the natural gas that currently escapes via green completion • Proposed rule would not require green completions for new exploratory (wildcat) wells, delineation wells, or low pressure wells; also not required if not feasible to get gas to a pipeline • Proposing that wells with a gas-to-oil ratio of less than 300 standard cubic feet of gas per barrel of oil would not be subject to green completion requirements • Requirements unchanged for natural gas wells

24 Proposed Methane Rule – Summary of Proposed Standards – Fugitive Emissions from Well Sites and Compressor Stations • New source category for well sites, production gathering & boosting stations, and natural gas compressor stations • For well sites, the proposed standards would require locating and repairing sources of fugitive emissions (leaks); well sites that contain only wellheads or are low production are excluded • Conduct survey with optical gas imaging within 30 days of well completion, followed by monitoring surveys twice a year • Any leaks found in survey would have to be repaired within 15 days, unless repair would require shut down

25 Proposed Methane Rule – Summary of Proposed Standards – Fugitive Emissions from Well Sites and Compressor Stations (Cont’d) • Proposed rule includes incentives for minimizing leaks • Seeking comment on whether corporate-wide leak detection and repair programs could be deemed to meet requirements of rule • Seeking comment on using EPA Method 21 as alternative to optical gas imaging (portable VOC monitoring equipment)

26 Proposed Aggregation Rule – Background

• For decades, EPA has used guidance to help states and companies determine how to classify stationary emission sources under the CAA major source permitting programs • “Major sources” must obtain and comply with major source operating permits (Title V permits); construction of major sources are subject to more stringent requirements under EPA’s New Source Review (NSR) programs • EPA guidance applied “functional dependence” or “functionally related” as a factor to determine whether two or more emissions sources were “adjacent” and part of the same stationary source • Aggregation of adjacent sources could result in a group of minor air emission sources being grouped together and triggering major source permitting requirements

27 Proposed Aggregation Rule – Background (Cont’d) • In 2012, the Sixth Circuit struck down EPA’s broad definition of “adjacency” in the context of aggregation in the oil & gas sector (Summit Petroleum Corp. v. EPA, 690 F.3d 733 (6th Cir. 2012)) • EPA attempted to limit the reach of the Summit decision with a policy directive to limit the decision to the states in the Sixth Circuit, but the D.C. Circuit vacated the policy directive in 2014 (National Environmental Development Association’s Clean Air Project v. EPA, 752 F.3d 999 (D.C. Cir. 2014)) • EPA chose rulemaking course, resulting in 2015 proposed rule

28 Proposed Aggregation Rule

• EPA is proposing to clarify how properties in the oil & gas sector are determined to be adjacent to assist states and permit applicants in making consistent source determinations for the sector – http://www.epa.gov/airquality/oilandgas/pdfs/sd_prop_081815.pdf • EPA is proposing two options for determining whether two or more properties are “adjacent” for defining “stationary source” in the PSD and NNSR programs and “major source” for Title V program – EPA’s preferred option would define “adjacent” for the oil & gas sector in terms of proximity • Equipment/activities would be considered adjacent if they are located on the same site or are on sites that are within a short distance (1/4 mile) of each other • Alternative option is to define “adjacent” in terms of proximity or functional interrelatedness – The definition would consider equipment or activities adjacent if they are near each other or if they are related by function (such as being connected by a pipeline)

29 Kirsten Nathanson Crowell & Moring LLP Washington, D.C. (202) 624-2887 [email protected]

30 Sources covered by the 2012 NSPS for VOCs and the 2015 Proposed NSPS for Methane and VOCs, by site Rules that Apply Location and Required to 2015 proposed Equipment/Process Reduce 2012 NSPS for 2015 proposed NSPS for Covered Emissions Under VOCs* NSPS for VOCs EPA Rules methane Natural Gas Well Sites Completions of

x x ط hydraulically wells Compressors Not covered x x ط Equipment leaks x x ط Pneumatic controllers x x ط Pneumatic pumps x ط Storage tanks Oil Well Sites Completions of x x ط hydraulically fractured wells Compressors Not covered x x ط Equipment leaks x x ط Pneumatic controllers x x ط Pneumatic pumps x ط Storage tanks Production Gathering and Boosting Stations x x ط Compressors x x ط Equipment leaks x x ط Pneumatic controllers x x ط Pneumatic pumps x ط Storage tanks Natural Gas Processing Plants x x ط Compressors x x ط Equipment leaks x x ط Pneumatic controllers x x ط Pneumatic pumps x ط Storage tanks Natural Gas Compressor Stations (Transmission & Storage) x x ط Compressors x x ط Equipment leaks x x ط Pneumatic controllers x x ط Pneumatic pumps x ط Storage tanks * Note: Sources already subject to the 2012 NSPS requirements for VOC reductions that also would be covered by the proposed 2015 methane requirements would not have to install additional controls, because the controls to reduce VOCs reduce both pollutants

Kathy G. Beckett | Member

Phone: (304) 353-8172 [email protected] Licensure: KY | WV J.D. West Virginia University

Twenty-five years of experience practicing environmental, regulatory, and natural resources law have enabled Kathy Beckett to develop a national reputation for her ability to influence environmental policies on behalf of her clients. She has been instrumental in the development of national and state regulatory programs and the drafting of environmental legislation. Ms. Beckett is active in many industry trade groups and serves on the Board of Directors of the U.S. Chamber of Commerce and is a past chair of the West Virginia Chamber of Commerce Environmental Committee. She has also served in a leadership capacity with the American Bar Association Section of Environment, Energy and Resources. Realizing that practicing environmental law is more than civil litigation, Ms. Beckett also has experience in the Homeland Security and Emergency Response sectors. REPRESENTATIVE EXPERIENCE

Represented oil and gas exploration and production facilities relative to air permitting issues to include air aggregation assessments

Represented chemical manufacturing operations on air compliance matters and waste management matters

Conducted environmental audit of chemical manufacturing facility

Represented national trade association in developing comments to an Endangered Species Act proposed listing

Filed administrative appeals of industrial NPDES permits and negotiated revised permit conditions

Represented coal-fired power industry on regional air quality issues

Developed multi-jurisdictional environmental crisis management plans

Developed major facility environmental permitting outline WORK EXPERIENCE

2013 Steptoe & Johnson PLLC

1997-2013 Jackson Kelly PLLC

1988-1996 Robinson & McElwee RECENT PUBLICATIONS / SPEAKING ENGAGEMENTS Failed Federal Collaboration: United States Fish and Wildlife Service State Relations LimeLight Series Webcast - April 10, 2014 Michigan v. EPA – Setting the Stage for The Clean Power Plan and WOTUS Steptoe & Johnson Expands Environmental and Energy Teams USFWS Species Listing An Internal Process USFWS WV Field Office Guidance on Bat Conservation Plans – Proceed Cautiously Waters of the United States – D.C. Circuit May 15, 2015 Home Builders II Opinion What Is On the Mind of the DOJ Environmental and Natural Resources Division? Kathy G. Beckett | Member

WV Senate Sends a Note to WVDEP in Rule Approval WV TMDL Litigation Challenging EPA "Oil and Gas Industry Waste Management Practices Exonerated By Court," American Oil & Gas Reporter, Sept. 1998 "Oil and Gas Industry Waste Management Practices Exonerated By Court," American Oil & Gas Reporter, Sept. 1998 "EPA Calls for an 'Audit' of the Nation's Water Quality Program," American Oil & Gas Reporter, Aug. 1998 "Global Warming Protocol Needs More Study Regarding Both Its Science And Effect," American Oil & Gas Reporter, Jan. 1998 "Consolidated Environmental Regulation in West Virginia," 97 W.Va. L. Rev. 401 (1995) "The Storm Water Regulatory Scheme: Washing an Industry Down the Drain?" 10 Journal of Natural Resources & Environmental Law 307 (1994) "Abandoned Well Initiatives: An Examination of Recently Enacted Legislation in the Eastern United States," 14 Eastern Min. L. lnst. 20 (1993) MEMBERSHIPS AND AWARDS PROFESSIONAL The Best Lawyers in America® Selected for inclusion in "Who's Who in Energy," Pittsburgh Business Times, 2012 Phi Beta Kappa, 1985 West Virginia State Bar Kentucky Bar Association West Virginia Bar Association Environment, Energy and Resources Section, American Bar Association

INDUSTRY/CIVIC Member, Board of Directors and Nominating Committee, U.S. Chamber of Commerce Chair, U.S. Chamber Energy, Clean Air & Natural Resources Committee Member, Board of Directors, West Virginia Chamber of Commerce Chair, Environment Committee, West Virginia Chamber of Commerce Member and Past Chair, Board of Trustees, Energy & Mineral Law Foundation Air & Waste Management Association - WV Chapter

Margaret Anne Hill Partner KŶĞ>ŽŐĂŶ^ƋƵĂƌĞϭϯϬEŽƌƚŚϭϴƚŚ^ƚƌĞĞƚͻWŚŝůĂĚĞůƉŚŝĂ͕WϭϵϭϬϯ-ϲϵϵϴ ǀ͘нϭ͘Ϯϭϱ͘ϱϲϵ͘ϱϯϯϭ f. +1.215.832.5331 tĂƚĞƌŐĂƚĞϲϬϬEĞǁ,ĂŵƉƐŚŝƌĞǀĞŶƵĞEtͻtĂƐŚŝŶŐƚŽŶ͕ϮϬϬϯϳ ǀ͘нϭ͘ϮϬϮ͘ϳϳϮ͘ϱϴϭϭ Bar Admissions [email protected] District of Columbia

Pennsylvania

Supreme Court of the CHAIR, ENVIRONMENTAL, ENERGY, AND NATURAL RESOURCES PRACTICE GROUP United States DĂƌŐĂƌĞƚ,ŝůůůĞĂĚƐůĂŶŬZŽŵĞ͛ƐŶǀŝƌŽŶŵĞŶƚĂů>ŝƚŝŐĂƚŝŽŶƉƌĂĐƚŝĐĞĂŶĚŚĂƐŵŽƌĞ U.S. District Court - ƚŚĂŶϮϱLJĞĂƌƐŽĨĞdžƉĞƌŝĞŶĐĞƌĞƉƌĞƐĞŶƚŝŶŐĐůŝĞŶƚƐŝŶĂůůĂƐƉĞĐƚƐŽĨƐƚĂƚĞĂŶĚĨĞĚĞƌĂů District of Columbia environmental laǁ͘DƐ͘,ŝůůƌĞƉƌĞƐĞŶƚƐĂŶĚĐŽƵŶƐĞůƐĂďƌŽĂĚƌĂŶŐĞŽĨĐůŝĞŶƚƐŝŶĂ U.S. District Court - ǁŝĚĞĂƌƌĂLJŽĨŝŶĚƵƐƚƌŝĞƐŝŶĐůƵĚŝŶŐŽŝůĂŶĚŐĂƐ͕ĐŚĞŵŝĐĂůĂŶĚƉŚĂƌŵĂĐĞƵƚŝĐĂů Western District of ĐŽŵƉĂŶŝĞƐ͕ĐŽƌƉŽƌĂƚĞĂŶĚďĂŶŬŝŶŐĐůŝĞŶƚƐ͕ĐŝƚŝĞƐĂŶĚŵƵŶŝĐŝƉĂůŝƚŝĞƐ͕ŵŝŶŝŶŐ Pennsylvania ĐŽŵƉĂŶŝĞƐ͕ĂŶĚĚĞǀĞůŽƉĞƌƐ͘DƐ͘,ŝůůĂƐƐŝƐƚƐĐůŝĞŶƚƐǁŝƚŚŶĂǀŝŐĂƚŝŶŐƚŚĞĐŽŵƉůĞdžŝƚŝĞƐ United States Court of of their business in the following areas: Appeals for the District of Columbia Circuit . ĞŶǀŝƌŽŶŵĞŶƚĂůĐŽŵƉůŝĂŶĐĞ—ĂƐƐĞƐƐŵĞŶƚƐ͕ƉĞƌŵŝƚƐ͕ĂƵĚŝƚƐ͕ĂŶĚƚŚĞĚƵĞ

ĚŝůŝŐĞŶĐĞƉƌŽĐĞƐƐ Memberships Member, American Bar . civil and criminal enforcement actions under CERCLA, RCRA, the Clean Air Association Act, the Clean Water Act and TSCA and state law equivalents

Member, Bar Association . ůŝƚŝŐĂƚŝŽŶŽĨĐŽŵƉůĞdžŝƐƐƵĞƐŝŶǀŽůǀŝŶŐƉƌŝǀĂƚĞĐŽƐƚƌĞĐŽǀĞƌLJĂŶĚĐůĞĂŶƵƉĐŽƐƚ of the District of allocation Columbia . ĐŽƌƉŽƌĂƚĞŝŶƚĞƌŶĂůŝŶǀĞƐƚŝŐĂƚŝŽŶƐƚŽŝĚĞŶƚŝĨLJĂŶĚĂďĂƚĞƉŽƚĞŶƚŝĂůǀŝŽůĂƚŝŽŶƐŽĨ Member, Pennsylvania Bar Association environmental laws

. leveraged lease transactions, leveraged buy-outs, and strategic investments of Education ŝŶĚƵƐƚƌŝĂůĂŶĚĐŽŵŵĞƌĐŝĂůƉƌŽƉĞƌƚŝĞƐ Duquesne University School of Law, JD . assets and stock acquisitions, including multi-facility industrial and commercial ĐŽŵƉĂŶŝĞƐ Northeastern University, MA, magna cum laude . ĐƌĞĚŝƚĂŐƌĞĞŵĞŶƚƐ͕ƐĞĐƵƌĞĚĨŝŶĂŶĐŝŶŐƐ͕ĂŶĚƉƌŽũĞĐƚĨŝŶĂŶĐĞdeals

West Chester University, . ďƌŽǁŶĨŝĞůĚƐƌĞĚĞǀĞůŽƉŵĞŶƚŝŶĐůƵĚŝŶŐůĂŶĚƵƐĞŝƐƐƵĞƐŝŶǀŽůǀŝŶŐůĂŶĚƌĞƐƚƌŝĐƚŝŽŶƐ BA, cum laude ĂŶĚĐŽŶƚƌŽůƐ͕ĂŶĚƚŚĞŽǁŶĞƌƐŚŝƉĂŶĚƵƐĞŽĨƌŝƉĂƌŝĂŶƌŝŐŚƚƐ

Ms. Hill has authored numerous articles in the area of environmental law and has ŐŝǀĞŶƐĞǀĞƌĂůƉƌĞƐĞŶƚĂƚŝŽŶƐ ƚŽĐůŝĞŶƚƐĂŶĚƉĞĞƌƐŝŶǀŽůǀŝŶŐĞŶǀŝƌŽŶŵĞŶƚĂůůĂǁƐĂŶĚ issues.

900400.00001/101337546v.1 DƐ͘,ŝůůŚĂƐĨĞĚĞƌĂůĂƉƉĞůůĂƚĞĞdžƉĞƌŝĞŶĐĞĂŶĚŚĂƐĂůƐŽĞŶŐĂŐĞĚŝŶůĞŐŝƐůĂƚŝǀĞĞĨĨŽƌƚƐ as a registered lobbyist on behalf of clients before the United States Congress. Prior ƚŽĞŶƚĞƌŝŶŐƉƌŝǀĂƚĞ ƉƌĂĐƚŝĐĞ͕ƐŚĞǁĂƐĞŵƉůŽLJĞĚďLJƚŚĞĞƉĂƌƚŵĞŶƚŽĨ:ƵƐƚŝĐĞĂƐĂ trial attorney in the Environment and Natural Resource Division. Ms. Hill also ǁŽƌŬĞĚĨŽƌ'ƵůĨKŝůŽƌƉŽƌĂƚŝŽŶĂƐĂWŽůŝĐLJĚǀŝƐŽƌƚŽƚŚĞ'ƵůĨKŝůdžƉůŽƌĂƚŝŽŶĂŶĚ WƌŽĚƵĐƚŝŽŶŽŵƉĂŶLJĂŶĚƚŚĞ'ƵůĨKŝůDŝŶĞƌĂůZĞƐŽƵƌĐĞƐŽŵƉĂŶLJ͘ DƐ͘,ŝůůŚĂƐƌĞĐĞŝǀĞĚƚŚĞŚŝŐŚĞƐƚƉŽƐƐŝďůĞƌĂƚŝŶŐĨƌŽŵDĂƌƚŝŶĚĂůĞ-Hubbell. Representative Matters . ZĞƉƌĞƐĞŶƚĂƚŝŽŶŽĨƉŚĂƌŵĂĐĞƵƚŝĐĂůĂŶĚĐŚĞŵŝĐĂůŵĂŶƵĨĂĐƚƵƌĞƌƐ͕ĂƐǁĞůůĂƐ ƉƌŝǀĂƚĞĞƋƵŝƚLJŝŶǀĞƐƚŽƌƐĂŶĚŚĞĚŐĞĨƵŶĚƐ͕ŝŶƚƌĂŶƐactions involving chemical ĐŽŵƉĂŶŝĞƐ͕ŵŝŶŝŶŐŽƉĞƌĂƚŝŽŶƐ͕ƐŚŝƉLJĂƌĚƐ͕ĞƚĐ͘ŝŶǁŚŝĐŚĞŶǀŝƌŽŶŵĞŶƚĂůƌŝƐŬƐ and liabilities were critical to the structure of the transaction and ŝŶǀĞƐƚŵĞŶƚĂŶĂůLJƐŝƐ͕ĂƐǁĞůůĂƐƐƚŽĐŬŚŽůĚĞƌĂƉƉƌŽǀĂůƐ . ZĞƉƌĞƐĞŶƚĂƚŝŽŶŽĨĂůĂƌŐĞŐŽǀĞrnment defense contractor in a RCRA ĞŶĨŽƌĐĞŵĞŶƚƉƌŽĐĞĞĚŝŶŐ͕ƌĞƉƌĞƐĞŶƚĂƚŝŽŶŽĨĂůĂƌŐĞĐŚĞŵŝĐĂůŵĂŶƵĨĂĐƚƵƌĞƌ in a multi-ŵĞĚŝĂĞŶĨŽƌĐĞŵĞŶƚŝŶƋƵŝƌLJ͕ƌĞƉƌĞƐĞŶƚĂƚŝŽŶŽĨĂŵĂƌŝŶĞ ƚƌĂŶƐƉŽƌƚĂƚŝŽŶĐŽŵƉĂŶLJŝŶĂůĞĂŶŝƌĐƚĞŶĨŽƌĐĞŵĞŶƚƉƌŽĐĞĞĚŝŶŐ͕ ƌĞƉƌĞƐĞŶƚĂƚŝŽŶŽĨ ĂƉƌŝǀĂƚĞŚĞĂůƚŚĐĂƌĞĐŽŵƉĂŶLJŝŶĂůĞĂŶŝƌĐƚĂƐďĞƐƚŽƐ ĞŶĨŽƌĐĞŵĞŶƚŵĂƚƚĞƌ͕ĂŶĚƌĞƉƌĞƐĞŶƚĂƚŝŽŶŽĨĂƐŚŝƉLJĂƌĚŽǁŶĞƌŝŶĂWZ ĞŶĨŽƌĐĞŵĞŶƚƉƌŽĐĞĞĚŝŶŐ . ZĞƉƌĞƐĞŶƚĂƚŝŽŶŽĨĐĂƐŝŶŽŽǁŶĞƌƐĂŶĚƉƌŝǀĂƚĞĚĞǀĞůŽƉĞƌƐŝŶƚŚĞ ĚĞǀĞůŽƉŵĞŶƚĂŶĚͬŽƌĞdžƉĂŶƐŝŽŶŽĨĐŽŵŵĞƌĐŝĂůĂŶĚƌĞƐŝĚĞŶƚŝĂůƉƌŽũĞĐƚƐ ƌĞƋƵŝƌŝŶŐĂƉƉƌŽǀĂůƐĂŶĚƉĞƌŵŝƚƐĨŽƌƌĞĚĞǀĞůŽƉŵĞŶƚŽĨĐŽŶƚĂŵŝŶĂƚĞĚ ƉƌŽƉĞƌƚŝĞƐĂŶĚƉĞƌŵŝƚƐĨŽƌƐƚĂƚĞĂŶĚĨĞĚĞƌĂůǁĞƚůĂŶĚƐ͕ůĂŶĚĨŝůůĐůŽƐƵƌĞƐ͕ ĞƌŽƐŝŽŶĂŶĚƐĞĚŝŵĞŶƚĂƚŝŽŶƉůĂŶƐ͕ĂŶĚŚŝƐƚŽƌŝĐĂůůLJĚĞƐŝŐŶĂƚĞĚƉƌŽƉĞƌƚŝĞƐ . ZĞƉƌĞƐĞŶƚĂƚŝŽŶŽĨƉƵďůŝĐĂŶĚƉƌŝǀĂƚĞĞŶƚŝƚŝĞƐŝŶŵƵůƚŝ-ƉĂƌƚLJƐƚĂƚĞĂŶĚĨĞĚĞƌĂů litigation involving cost-recovery and indemnity claims as well as contribution claims for contamination and remediation being conducted ƵŶĚĞƌ^ƵƉĞƌĨƵŶĚĂŶĚZZ͕ĂƐǁĞůůĂƐƐŝŵŝůĂƌƐƚĂƚĞůĂǁƐ . ZĞƉƌĞƐĞŶƚĂƚŝŽŶŽĨĐĂƐŝŶŽĚĞǀĞůŽƉĞƌƐŝŶĐŽŶŶĞĐƚŝŽŶǁŝƚŚƚŚĞƌĞĚĞǀĞůŽƉŵĞŶƚ ŽĨĐŽŶƚĂŵŝŶĂƚĞĚƉƌŽƉĞƌƚLJĂĚũĂĐĞŶƚƚŽƌŝǀĞƌĨƌŽŶƚƉƌŽƉĞƌƚLJĂŶĚĞǀĂůƵĂƚŝŽŶŽĨ ƌŝƉĂƌŝĂŶůĂŶĚŝƐƐƵĞƐ

900400.00001/101337546v.1 2 6th Law of Shale Plays Conference Margaret A. Hill, Esq. September 11-12, 2015 Blank Rome LLP Pittsburgh, PA

Midstream Development Litigation Trends

I. INTRODUCTION

The rapid increase in oil and gas production in the U.S. in recent years has spurred an increase in demand for midstream infrastructure projects in order to get the products from the wellhead to demanding markets. However, the current network of pipelines in the Marcellus

Shale Basin, and in other shale plays throughout the United States, is insufficient to handle the full production potential. As a result, more pipeline infrastructure projects have been undertaken in recent years, particularly with respect to gathering pipelines that take product from the wellhead to refineries for processing, and transmission lines for further transportation.

Unsurprisingly, the increase in midstream infrastructure projects has led to numerous lawsuits, some of which are filed by public interest groups who want to either see more stringent regulation or who want to block the project altogether, and some of which are filed by the owner of the project where the owner disagrees with the regulator’s final decision. These cases involve a number of federal statutes, including the National Environmental Policy Act, 42 U.S.C. §§

4321-4370h; the Clean Air Act, 42 U.S.C. §§ 7401-7671q; the Clean Water Act, 33 U.S.C. §§

1251-1387; the Endangered Species Act, 16 U.S.C. §§ 1531-1544. These cases sometimes also involve common law claims such as nuisance and trespass and often involve disagreements about the use of eminent domain. The following is a brief discussion of legal issues facing midstream infrastructure projects and illustrative cases involving those issues.

1

999998.02900/101310552v.1 6th Law of Shale Plays Conference Margaret A. Hill, Esq. September 11-12, 2015 Blank Rome LLP Pittsburgh, PA

II. ENVIRONMENTAL LITIGATION

A. The National Environmental Policy Act (“NEPA”) (T)

Under NEPA, FERC is required to include "connected actions," "cumulative actions," and "similar actions" in an Environmental Impact Statement or Environmental Assessment. 40

C.F.R. § 1508.25(a)(1)-(3); Myersville Citizens for a Rural Cmty., Inc. v. FERC, 783 F.3d 1301

(D.C. Cir. 2015). “An agency impermissibly ‘segments’ NEPA review when it divides connected, cumulative, or similar federal actions into separate projects and thereby fails to address the true scope and impact of the activities that should be under consideration.” Del.

Riverkeeper Network v. FERC, 753 F.3d 1304, 1313 (D.C. Cir. 2014) (internal quotation marks omitted). "The purpose of this requirement is to prevent agencies from dividing one project into multiple individual actions each of which individually has an insignificant environmental impact, but which collectively have a substantial impact." NRDC v. Hodel, 865 F.2d 288, 297

(D.C.Cir.1988) (internal quotation marks omitted). "Connected actions" include actions that are

"interdependent parts of a larger action and depend on the larger action for their justification."

40 C.F.R. § 1508.25(a)(1)(iii) .

In Delaware Riverkeeper Network v. FERC, 753 F.3d 1304 (D.C. Cir. 2014), the D.C.

Circuit held that FERC unlawfully segmented its environmental review where four other pipeline projects were "certainly 'connected actions'" that, taken together, would result in "a single pipeline," that was "linear and physically interdependent," and contained "no physical offshoots."

Id. at 1308, 1316. In addition, the other pipelines were under construction or pending review when the contested application was filed, FERC’s review of the projects was overlapping, and their cumulative effects were visited on the same environmental resources. Id. at 1318. The

D.C. Circuit premised its decision requiring joint NEPA consideration on the unquestionable 2

999998.02900/101310552v.1 6th Law of Shale Plays Conference Margaret A. Hill, Esq. September 11-12, 2015 Blank Rome LLP Pittsburgh, PA connectedness of the projects, the fact that the projects all were under consideration by the

Commission at the same time, and the fact that the projects were financially interdependent. Id. at 1318.

The absence of all of those factors led the D.C. Circuit to reject an analogy to Delaware

Riverkeeper in its decisions in Minisink Residents for Envtl. Pres. & Safety v. FERC, 762 F.3d

97, 412 U.S. App. D.C. 97 (D.C. Cir. 2014) and in Myersville Citizens for a Rural Cmty., Inc. v.

FERC, 783 F.3d 1301 (D.C. Cir. 2015). In Myersville, the petitioners challenged FERC’s approval of an EA for the “Allegheny Storage Project,” claiming that the Cove Point LNG export project was a "connected action" that NEPA requires to be considered together with the

Allegheny Storage Project. In Minisink and Myersville, the D.C. Circuit rejected the petitioners argument that the project that FERC found unrelated was nevertheless a "connected action,” distinguishing the connectedness and timing of the projects at issue in Delaware Riverkeeper.

Minisink, 762 F.3d at 113 n.11; Myersville, 783 F.3d at 1326.

Additional recently-decided cases involving NEPA issues include: Riverkeeper v. FERC,

No. 14-1062, 2015 BL 231998 (D.C. Cir. July 21, 2015); Ky. Coal Ass'n v. TVA, 68 F. Supp. 3d

703 (W.D. Ky. 2015) (addressing allegation of improper segmentation of project components);

No Gas Pipeline v. FERC, 756 F.3d 764, 410 U.S. App. D.C. 392 (D.C. Cir. 2014) (); Coal. for

Responsible Growth & Res. Conservation v. FERC, 485 Fed. Appx. 472 (2d Cir. 2012)

(upholding Section 7(c) Certificate authorizing Central NY Oil to build and operate the 39-mile long MARC I Hub Line Project natural gas pipeline in Pennsylvania, and to build and operate related facilities).

A pending case, filed in the D.C. Circuit in May 2015, is Sierra Club v. FERC, No. 15-

1133 (D.C. Cir. filed 5/11/2015), which is a challenge to a FERC order authorizing Corpus 3

999998.02900/101310552v.1 6th Law of Shale Plays Conference Margaret A. Hill, Esq. September 11-12, 2015 Blank Rome LLP Pittsburgh, PA

Christi Liquefaction to site, construct, and operate LNG export and import facilities on Corpus

Christi Bay, Texas, and to construct and operate related pipeline and compressor facilities.

B. The Clean Air Act (T)

In Summit Petroleum Corp. v. EPA, 690 F.3d 733 (6th Cir. 2012), EPA determined that

Summit’s facilities constituted a single major source on the basis that the plants were contiguous or adjacent under the third prong of the major source test, particularly based on their “functional interrelationship.” The Court struck down EPA’s sole reliance on “functional interrelationship” to determine adjacency, holding that, in order for them to be adjacent there must be “physical proximity.” Following the Sixth Circuit’s decision in Summit, EPA issued a memorandum

(“Summit Memorandum”), which stated that, outside of the Sixth Circuit, “EPA will continue to make source determinations on a case-by-case basis using the three factor test in the NSR and

Title V regulations at 40 C.F.R. 52.2(b)(6).” On May 30, 2014, the D.C. Circuit struck down

EPA’s Summit Directive Memorandum, holding that the Summit Memorandum violated EPA’s

“Regional Consistency” regulations at 40 C.F.R. § 56.3. National Environmental Development

Association’s Clean Air Project v. EPA (D.C. Cir. May 30, 2014). The Court suggested that

EPA could amend its CAA regulations.

C. The Clean Water Act (T)

In Tenn. Gas Pipeline Co. v. Del. Riverkeeper Network, 921 F. Supp. 2d 381 (M.D. Pa.

2013), the plaintiff, Tennessee Gas Pipeline Company LLC ("TGPC"), had acquired permits under the Pennsylvania Clean Streams Law as required by a FERC order issuing a Section 7(c)

Certificate to TGPC. Delaware Riverkeeper Network (“DRN”) appealed the Pennsylvania

Department of Environmental Protection’s (“PADEP”) of those permits to the Pennsylvania

4

999998.02900/101310552v.1 6th Law of Shale Plays Conference Margaret A. Hill, Esq. September 11-12, 2015 Blank Rome LLP Pittsburgh, PA

Environmental Hearing Board (“EHB”). In response, TGPC filed a complaint and a motion for an emergency preliminary injunction to prevent the EHB from reviewing the permits. The

Middle District of Pennsylvania issued a declaratory judgment that the Natural Gas Act preempted the EHB from reviewing permits that PADEP had issued to TGPC as required by

FERC Order.

The case of Sierra Club, Inc. v. Bostick, 787 F.3d 1043 (10th Cir. 2015), involved the authority of the U.S. Army Corps of Engineers (“Corps”) to issue nationwide permits under §

404(e) of the Clean Water Act, namely “Nationwide Permit 12,” which allows anyone to construct utility lines in U.S. waters "provided the activity does not result in the loss of greater than 1/2 acre of [U.S. waters] for each single and complete project." Environmental groups challenged the Corps’s decision that Nationwide Permit 12 would cover TransCanada

Corporation’s proposed Gulf Coast Pipeline, which would run approximately 485 miles and cross over 2,000 waterways. The Court held that Nationwide Permit 12 did not violate the

CWA.

D. The Endangered Species Act (F)

The Endangered Species Act (“ESA”) establishes a comprehensive scheme with the broad purpose of providing protection to threatened and endangered species and their associated habitat irrespective of monetary cost. Environmental groups have turned to the Endangered

Species Act (“ESA”) as a means to challenge oil and gas development generally, and pipeline development in particular. For example, in October 2012, the Ninth Circuit Court of Appeals in

Center for Biological Diversity v. Bureau of Land Management, 698 F.3d 1101 (9th Cir. 2012) overturned FERC’s approval of the Ruby Pipeline, a 678-mile natural gas pipeline from

Wyoming to Oregon. In that case, the Ninth Circuit vacated the Bureau of Land Management’s 5

999998.02900/101310552v.1 6th Law of Shale Plays Conference Margaret A. Hill, Esq. September 11-12, 2015 Blank Rome LLP Pittsburgh, PA authorization for the project, and the U.S. Fish and Wildlife Service’s (“FWS”) biological opinion, finding that the opinion was arbitrary and capricious because certain protective measures set forth the conservation plan were not enforceable by the FWS under the ESA and because the opinion failed to account for groundwater pumping during pipeline construction.

Often times, a plaintiff’s ESA arguments are subsumed within a broader NEPA claim.

For example, in Sierra Club v. United States Army Corp. of Engineers, 64 F. Supp. 3d 128

(D.D.C. 2014), Sierra Club and the National Wildlife Federation challenged the federal government’s approval of the Flanagan South Pipeline (“FS Pipeline”) a 589-mile privately owned oil pipeline running from Illinois to Oklahoma, on the grounds that the federal agencies failed consider the impacts of the entire pipeline. With respect to the ESA, the plaintiffs argued that the FWS had a duty to review the entire pipeline as a result of the Biological Opinion and incidental take statement it issued. The court rejected this argument, however, finding that involvement of the various federal agencies did not “federalize” an essentially private project so as to implicate NEPA. Said another way, the federal government’s involvement in the devolvement of the FS Pipeline did not result in a “major Federal Action” that would trigger

NEPA review. Nevertheless, this case represents another attempt by interest groups to use the

ESA (here, in conjunction with NEPA) in an effort to enjoin a pipeline project. See also

WildEarth Gaurdians v. U.S. Forest Service, et al., Case No. 2:14-cv-00349, (D. Utah 2014)

(plaintiffs arguing that the Forest Service and Bureau of Land Management failed to take “hard look” at the impacts of a project involving 400 wells and 87 miles of natural gas pipeline on sage grouse populations).

Relatedly, some environmental groups have been accused of engaging in “sue and settlement” tactics with the federal government to promote the listing of certain species as 6

999998.02900/101310552v.1 6th Law of Shale Plays Conference Margaret A. Hill, Esq. September 11-12, 2015 Blank Rome LLP Pittsburgh, PA endangered or threatened. Some government officials are fight back, claiming that the federal government is improperly colluding with environmental groups by reaching “friendly settlements” that violate the ESA and have crippling effect on the U.S. economy. For example, the Oklahoma Attorney General and an oil and gas trade group sued the federal government alleging that the U.S. Fish and Wildlife Service violated the Endangered Species Act by agreeing to a settlement with WildEarth Guardians that led to a consent decree requiring the agency to determine the listing status of the lesser prairie chicken. See State of Oklahoma, et al. v.

Department of Interior, et al.,CA No. 4:14-123 (N.D. Okla.). That case was recently transferred to the District of District of Columbia, MDL No. 2165, where it is currently pending.

One can expect the ESA to remain a tool frequently used by interest groups, likely in conjunction with NEPA and other environmental claims. Whether the actual aim of the lawsuits is protection of a certain species, or a hidden agenda to stop certain projects, is up for debate.

E. Common Law Claims (F)

Oil and gas upstream operators are no stranger to common law tort claims. There have been a multitude of lawsuits that have been filed regarding drilling and related upstream activities that allege tort claims. The most frequently encountered claims are nuisance and trespass, although other common claims involve negligence, medical monitoring, strict liability, battery, and intentional fraudulent concealment. Damages are frequently sought for loss of market value of property, sickness, mental anguish, and bodily harm. In a well-publicized case, a Texas jury awarded plaintiffs $2.9 million to a family that alleged they suffered health problems as a result of drilling activities in the Barnett Shale, finding the drilling company

7

999998.02900/101310552v.1 6th Law of Shale Plays Conference Margaret A. Hill, Esq. September 11-12, 2015 Blank Rome LLP Pittsburgh, PA intentionally created a private nuisance. See Parr v. Aruba Petroleum, Inc., Case number CC-

11-01650-E, Count Court at Law No. 5, Dallas County, Texas.

For all the same reasons upstream activities are susceptible to common law claims, so too are midstream activities which include pipelines as well as attendant facilities such as pump stations and compressor stations. Compressor stations are important components to natural gas transportation station because they compress the gas which allows the gas to travel through a pipeline as a liquid. Generally, compressor stations are located every 40-70 miles along a pipeline. In Smith v. Southwestern Energy Company, No. 4-12-cv-00423 (E.D. Ark. July 11,

2012), plaintiffs filed a complaint asserting causes of action for strict liability, nuisance, trespass, and negligence as a result of the noise, vibration, and emissions from a compressor station. The case, however, was dismissed when a necessary, non-diverse party intervened, thus destroying complete diversity.

Plaintiffs may also institute common law claims when a pipeline, or a related facility, fails in some way. For example, in Fredonia Farms, LLC v. Enbridge Energy Partners, L.P.,

2014 U.S. Dist. LEXIS 97677 (W.D. Mich. July 18, 2014), plaintiffs brought claims of negligence, gross negligence, nuisance, strict liability under the Oil Pollution Act, conversion, and unjust enrichment as a result of an oil pipeline leak. On summary judgment, the court dismissed certain plaintiffs, but found that the remaining claims of conversion and unjust enrichment could proceed. See also Valley View Ranch, Inc. v. Duke Energy Field Services, LP,

2010 U.S. Dist. LEXIS 24859 (10th Cir. 2010)(upholding jury verdict for $169,000 related to plaintiff’s claims of nuisance, trespass, and unjust enrichment arising from a leaking oil and gas pipeline).

8

999998.02900/101310552v.1 6th Law of Shale Plays Conference Margaret A. Hill, Esq. September 11-12, 2015 Blank Rome LLP Pittsburgh, PA

The bottom line is that an oil and gas company may be subjected to common law claims arising from the normal operation of midstream facilities, or arising from a malfunction or other failure of those facilities.

III. EMINENT DOMAIN LITIGATION (F)

One of the biggest challenges to any pipeline project, especially those located in densely populated areas, is gaining the right of way or easement to use a section of a landowner’s land for the pipeline. Pipeline operators can gain right of ways by negotiating easements with landowners, or, when necessary and if possible, exercising the power of eminent domain.

Pipeline companies frequently file complaints in condemnation seeking the right of eminent domain. However, the right to use eminent domain is dictated, in part, by the type of pipeline at issue. Natural gas pipelines are regulated under the Natural Gas Act (“NGA”), which gives natural gas companies the right to condemn property for natural gas pipelines, provided FERC determines the pipeline is in the public interest. The NGA also provides for federal preemption of state and local laws that interfere with a FERC-approved project. Liquids pipelines (i.e., oil and natural gas liquids), however, are not governed by the NGA, and instead are regulated under the Interstate Commerce Act (“ICA”). Notably absent from the ICA are the powers of eminent domain and preemption that are provided by the NGA. Thus, a liquids pipeline operator seeking to obtain eminent domain powers must do so through other means, such as being certificated as a public utility by a state authority.

Given the high volume of eminent domain proceedings in the U.S., it is well-beyond the scope of this paper to list or mention each one. As an example, in December 2014 alone,

Constitution Pipeline Company filed 121 eminent domain cases in connection with the

9

999998.02900/101310552v.1 6th Law of Shale Plays Conference Margaret A. Hill, Esq. September 11-12, 2015 Blank Rome LLP Pittsburgh, PA

Constitution Pipeline, a 126-mile pipeline project that will bring natural gas from northeastern

Pennsylvania to New York. For a recent examples of eminent domain cases in Pennsylvania that discusses this issue at length, see Columbia Gas Transmission, LLC v. 1.01 Acres, et al., 768

F.3d 300 (3d Cir. 2014) (holding that Columbia Gas Transmission LLC has the right of eminent domain under the Natural Gas Act to obtain easements over the land of objecting landowners to replace a pipeline segment); see also Columbia Gas Transmission, LLC v. 10.5066 Acres, et al.,

2015 U.S. Dist. LEXIS 41628 (M.D. Pa. March 31, 2015) (granting Columbia Gas’s motion for preliminary injunction for immediate possession of certain easements in York County for the purpose of replacing a natural gas pipeline).

The bottom line is that although eminent domain is not a tool of used by interest groups for broad-scale opposition to pipeline projects, pipeline operators should nevertheless expect significant opposition from landowners denying access to their property, opposition which may require the initiation of eminent domain proceedings.

10

999998.02900/101310552v.1 LARRY W. NETTLES PARTNER

Larry Nettles, a partner in Vinson & Elkins’ Houston office, has been practicing environmental law full-time since 1981 and has an exceptionally broad range of environmental law experience that makes him particularly well suited to advise clients with multi-faceted environmental problems, such as those frequently encountered in large business transactions. Larry currently serves as Co-Chair of the firm’s Energy and Infrastructure Practice Group and Chair of the Shale and Hydraulic Fracturing Task Force, and is a member of the firm’s Environmental and Natural Resources and Climate Change Practice Groups.

Larry has been recognized as the top environmental lawyer in the United States for the past eight years by United States Lawyer Rankings. He has also been recognized as one of the best environmental lawyers in the nation in the most recent edition of Best Lawyers in America®; one of the best environmental law attorneys in Texas on the "Texas Super Lawyers" list published in Texas Monthly, and by Chambers & Partners in its recent guidebook on America's Leading Lawyers for Business.

BLM Releases Final Hydraulic Fracturing Regulations

V&E Shale Insights — Tracking Fracking E-communication, March 25, 2015

On March 20, 2015, the U.S. Interior Department’s Bureau of Land Management (BLM) released a much-anticipated final rule regulating hydraulic fracturing activities on Federal and Indian lands. The final rule includes new well-bore integrity requirements, imposes standards for interim storage of recovered waste fluids, and requires notifications and waiting periods for key parts of the fracturing process, which could lead to delays in fracturing and/or drilling operations. The rule also mandates disclosure of the chemicals used in the process, which can be done via the industry-supported FracFocus website. The rule will take effect 90 days after it is eventually published in the Federal Register.

Background

BLM reviews and approves permits and licenses from companies to explore, develop, and produce energy on the 700 million sub-surface acres of mineral estate under Federal and Indian lands. As a result, BLM currently regulates roughly 6 percent of domestic onshore oil production and 13 percent of onshore natural gas production. There are more than 100,000 existing oil and gas wells on federally-managed lands—over 90 percent of which employ hydraulic fracturing techniques. BLM estimates that the new rule will impact about 2,800 hydraulic fracturing operations per year, but that it could impact up to 3,800 operations per year based on previous levels of activity on Federal lands and growing activity on Indian lands.

The new rule is the first revision to BLM’s hydraulic fracturing regulations since 1988. The agency unveiled its first proposal to update these rules on May 4, 2012.1 In the three years since then, the agency has reviewed a total of more than 1.5 million public comments and revised the rule several times. BLM withdrew its 2012 proposal after receiving an extraordinary large (177,000) number of public comments and heavy opposition from industry members who criticized the proposal as unnecessarily onerous and duplicative of state regulatory regimes already addressing these issues. In 2013, BLM issued a revised proposal2 again focused on the same three main objectives as the 2012 proposed rule: (1) chemical disclosure, (2) well construction and cementing requirements, and (3) flowback management plans. On March 20, 2015—almost two years after the previous proposal, and nearly three years after the initial proposal—BLM issued a final rule that tracks the 2013 proposal in most respects, but also contains a few key changes.

1 Oil and Gas; Well Stimulation, Including Hydraulic Fracturing, on Federal and Indian Lands, 77 Fed. Reg. 27,691 (proposed May 4, 2012) (to be codified at 43 C.F.R. pt. 3160) [hereinafter 2012 Proposal]. 2 Oil and Gas; Hydraulic Fracturing on Federal and Indian Lands, 78 Fed. Reg. 31,636 (proposed May 16, 2013) (to be codified at 43 C.F.R. pt. 3160) [hereinafter 2013 Proposal].

©2015 Vinson & Elkins LLP www.velaw.com 1 The Final Rule

BLM Approval for Hydraulic Fracturing and Pre-Fracturing Submissions

The final rule requires operators to obtain BLM approval before beginning hydraulic fracturing activities by providing two different administrative vehicles whereby an operator may request BLM’s approval for hydraulic fracturing activities—an Application for Permit to Drill (APD) and a notice of intent (NOI).3 The rule also allows operators to submit a “master hydraulic fracturing plan” for a group of wells in formations with substantially similar geologic characteristics.4 These operators must also obtain an approved APD for each individual well5 in order to satisfy other BLM requirements.6, For wells that are already in various stages of permitting, drilling, and completion, the rule sets forth a detailed table clarifying exactly which provisions of the rule are applicable based upon the timing of various administrative and operational milestones in relation to the final rule’s effective date.7 Operators with wells currently in the permitting, drilling, or completion phases should carefully review this table, as well as the associated preamble text,8 to determine what portions of the rule apply to their operations and what specific vehicles are available to obtain BLM approval before beginning hydraulic fracturing activities.

BLM significantly narrowed the scope of its regulations in the final rule to regulate only “hydraulic fracturing.” The final rule defines “hydraulic fracturing” as “those operations conducted in an individual wellbore designed to increase the flow of hydrocarbons from the rock formation to the wellbore through modifying the permeability of reservoir rock by applying fluids under pressure to fracture it.”9 The 2012 proposed rule would also have regulated “well stimulation” to include such activities as acidization and could have been interpreted to apply to such activities as thermal stimulation and maintenance fracturing. The definition in the final rule specifically notes that “[h]ydraulic fracturing does not include enhanced secondary recovery such as water flooding, tertiary recovery, recovery through steam injection, or other types of well stimulation operations such as acidizing.”10 The final rule also dropped all references to refracturing because the requirements for permitting, performing, monitoring, and reporting hydraulic

3 Oil and Gas; Well Stimulation, Including Hydraulic Fracturing, on Federal and Indian Lands, RIN 1004-AE26 (Mar. 20, 2015) (to be codified at 43 C.F.R. pt. 3160), available at http://www.blm.gov/style/medialib/blm/wo/Communications_Directorate/public_affairs/news_release_attachments.P ar.6134.File.dat/HF-Final-Agency-Draft.pdf [hereinafter Final Rule], Section 3162.3-3(c). 4 Final Rule, Section 3162.3-3(c)(3); see Final Rule, at 375. 5 Final Rule, Section 3162.3-3(c)(3) 6 Final Rule, at 59. 7 Final Rule, Section 3162.3-3(a). 8 See Final Rule, at 79-82. 9 Final Rule, Section 3160.0-5. 10 Final Rule, Section 3160.0-5.

©2015 Vinson & Elkins LLP www.velaw.com 2 fracturing operations are identical whether the well is hydraulically fractured for the first time or any subsequent stimulation.11

The pre-fracturing submissions must include various types of information concerning topics such as:

x the formation: the measured or estimated depths of usable water based on a drill log from the specific well or type well, the top and bottom depths of the formation where the hydraulic fracturing fluids (or “frac fluids”) will be injected, and the “confining zones;”12

x the fluids: the source and anticipated access route and transportation method for bringing such water to the site, anticipated volumes, and estimated fluid recovery volumes, and the proposed method for handling and disposal of recovered fluids; 13

x wellbore information: the maximum anticipated surface pressure, wellbore trajectory, the estimated direction and length of fractures, and the locations, trajectories, and depths of existing wellbores within a half mile of the wellbore;14 and

x seismicity: as, a map showing the location, orientation, and extent of any known or suspected faults or fractures within one-half mile (horizontal distance) of the wellbore trajectory that may transect the confining zone(s).15

11 Final Rule, at 61. 12 Final Rule, Section 3162.3-3(d). BLM’s definition of a “confining zone” tracks the definition used by the Environmental Protection Agency in its Underground Injection Control program. See 40 C.F.R. §146.3. 13 Final Rule, Section 3162.3-3(d). 14 Id. 15 Id.

©2015 Vinson & Elkins LLP www.velaw.com 3 Baseline Monitoring

The final rule does not require “baseline monitoring” but expresses BLM’s view that such testing and monitoring is a “best management practice.”16 BLM noted that complicated split-estate ownership issues and the wide variety of hydrogeological conditions across BLM lands would, in its view, make a broad baseline testing requirement “confusing and of limited value.”17 However, BLM reserved its authority to require baseline testing and monitoring on a case-by-case basis through two specific mechanisms—either as a “condition of approval” (COA) in a BLM drilling permit in cases where BLM also manages the surface,18 or, where BLM’s assessment of impacts to water quality as part of the National Environmental Policy Act (NEPA) process reveals that such impacts are not sufficiently addressed, as a condition to BLM’s approval for a project under NEPA.19

Fluid Storage

In addition to the information related to flowback management required in the pre-fracturing submissions described above, the final rule also imposes substantive requirements on the storage of recovered fluids. The rule requires all recovered fluids to be stored in above-ground tanks unless BLM approves storage in lined pits in advance.20 This requirement differs from the 2013 proposal, which would have allowed operators to use lined pits or tanks. The above- ground tanks required under the final rule must be rigid and enclosed, covered, or netted and screened.21 The tanks may be vented (unless Federal, state or tribal law require vapor recovery or closed-loop systems), but may not exceed a 500-barrel (bbl) capacity unless approved in advance. 22 Approval to use lined pits will only be granted in limited circumstances when the operator demonstrates that use of a tank is infeasible for environmental, public health or safety reasons.23 The pit must also meet additional requirements—which include minimum distances from certain bodies of water, residences, schools, and businesses—as well as quality and inspection requirements.24

Cementing and Construction Requirements

The final rule includes a number of provisions designed to protect “usable water” from hydraulic fracturing activities. “Usable water” is defined as underground sources of drinking water, zones

16 Final Rule, at 7. 17 Id. at 228-29. 18 Id. at 34-35. 19 Id. at 229. 20 Final Rule, Section 3162.3-3(h)(1). 21 Id. 22 Id. 23 Final Rule, Section 3162.3-3(h)(1). 24 Final Rule, Section 3162.3-3(h)(1).

©2015 Vinson & Elkins LLP www.velaw.com 4 used for water supply for industrial or agricultural purposes, and zones designated by the state or tribe as requiring isolation or protection from oil and gas operations or water with 10,000 ppm total dissolved solids (TDS) or lower.25 The final rule requires operators to isolate all usable water from mineral-bearing formations and to protect water-bearing formations from contamination.26

The final rule also requires operators to monitor and record several important metrics associated with cementing operations including the flow rate, density, and pump pressure.27 Operators must also submit a cement operation monitoring report “for each casing string used to isolate and protect usable water . . . .”28 Cement monitoring reports must be submitted at least 48 hours prior to commencing hydraulic fracturing operations unless the authorized officer approves otherwise.29 If a well was already completed pursuant to an APD that did not authorize hydraulic fracturing operations, the operator must submit documentation to demonstrate that adequate cementing was achieved no less than 48 hours before conducting hydraulic fracturing operations.30 For such wells, BLM may require additional testing or verifications of cementing on a case-by-case basis before approving the hydraulic fracturing.31

Additionally, operators must provide documentation of adequate surface casing.32 If the casing is not cemented to the surface, the operator must also run a Cement Evaluation Log (CEL) demonstrating that there is at least 200 feet of adequately bonded cement protecting the deepest usable water zone.33 The final rule also obligates operators who become aware that cementing is inadequate on ”any well” to notify BLM within 24 hours of determining there is inadequate cement. Operators must then submit and plan to remediate the issue, obtain approval to perform the plan or other remedial actions, and document performance of the remedial actions.34 Operators must also submit test results demonstrating that the remedial actions were successful at least 72 hours before starting hydraulic fracturing operations.35

25 Final Rule, Section 3160.0-5. 26 Final Rule, Sections 3162.3-3(b), 3162.5-2(d). 27 Final Rule, Section 3162.3-3(e)(1)(i). 28 Id. 29 Id. 30 Final Rule, Section 3162.3-3(e)(1)(ii). 31 Id. 32 Final Rule, Section 3162.3-3(e). 33 Final Rule, Section 3162.3-3(e)(2). 34 Final Rule, Section 3162.3-3(e)(3). The rule requires operators to submit a form requesting approval, but provides that operators may request oral approval in emergency situations. See Final Rule, Section 3162.3-3(e)(3)(ii). 35 Id.

©2015 Vinson & Elkins LLP www.velaw.com 5 The rule also requires that operators perform a Mechanical Integrity Test (MIT) prior to hydraulic fracturing,36 and that operators continuously monitor and record the annulus pressure.37 When pressures within the annulus increase by more than 500 psi, the operator must stop hydraulic fracturing operations and determine the reasons for the increase.38

Chemical Disclosure

The final rule also requires operators to disclose the liquid mixtures, or frac fluids, pumped into wells during hydraulic fracturing operations.39 Frac fluids typically consist of 98 percent to 99.5 percent water and 2 percent to 0.5 percent chemical additives.40 Many industry members consider the exact recipe of their frac fluid to be valuable intellectual property and confidential information.

The final rule does not require operators to make disclosures until after completion of the fracturing operation 41 which allows operators the flexibility to customize frac fluid composition during drilling. Submissions must be made within 30 days after the last stage of hydraulic fracturing operations on each well is complete.42 Operators must describe and report the base fluid and each chemical added to the hydraulic fracturing fluid, including disclosure of all additives by trade name, supplier, purpose, and Chemical Abstract Service number (CAS), and maximum ingredient concentrations.43

The final rule clarifies that the industry website, FracFocus, will be the forum for public disclosure.44 FracFocus is already used by many state regulatory regimes for these types of chemical disclosures. Operators may disclose directly to FracFocus or to BLM, who will in turn submit the reports for public disclosure via FracFocus.

The final rule allows operators to protect some trade secret information in their frac fluid formulas, but only such information exempt from public disclosure pursuant to a Federal statute or regulation that would prohibit BLM from disclosing the information if it were in BLM’s possession, such as the Federal Trade Secrets Act.45 The final rule expands the requirements of

36 Final Rule, Section 3162.3-3(f)(1)-(2). 37 Final Rule, Section 3162.3-3(g)(1)-(2). 38 Id. 39 Final Rule, Section 3162.3-3(i)(1). 40 U.S. Department of Energy, Modern Shale Gas Development in the United States, republished at Hydraulic Fracturing Fluids - Composition and Additives, Geology.com, available at http://geology.com/energy/hydraulic- fracturing-fluids/. 41 Final Rule, Section 3162.3-3(i). 42 Id. 43 Final Rule, Section 3162.3-3(i)(1). 44 Final Rule, Section 3162.3-3(i). 45 Id.; Final Rule, at 181.

©2015 Vinson & Elkins LLP www.velaw.com 6 the accompanying affidavit asserting a trade secret: the operator’s affidavit must identify any other entity, such as a contractor or supplier, which would be the owner of the withheld information, and must submit an affidavit from that entity providing any information upon which the operator relies in executing the operator’s affidavit.46 The operator also must affirm that it has possession of the withheld information so that BLM could have access to it upon request. A corporate officer, managing partner, or sole proprietor must then sign the operator’s affidavit. Finally, the operator must maintain the withheld information for the later of: (1) BLM’s approval of the final abandonment notice for the well, or (2) six years for Indian lands, and seven years for Federal lands.47 As in the 2013 proposed rule, BLM may require the operator to provide the withheld trade secret information to the agency.48

Duplicative Regulation and Variances

Many in the industry opposed BLM’s 2012 proposal, arguing that the rules both duplicated and conflicted with pre-existing state regulations. BLM took some measures in the 2013 proposal to lessen these duplications, including reducing some of the information requirements in the revised draft to reduce the burden on operators and avoid redundancy of regulations. BLM also stated that it would enter formal agreements with the states and tribes to reduce duplication of efforts in implementing the proposed rule.

Under the final rule, BLM allows individual operators to request variances in writing.49 Such requests must specify the provision for which relief is sought, explain the reason relief is needed, and identify how the operator proposes to “satisfy the objectives of the regulation for which the variance is being requested.”50 State or Indian variances are also available, and will depend on formal agreements between the “involved agency” and BLM.51 While BLM does not provide for statewide exemptions from the entire hydraulic fracturing rule, variances may be granted for individual provisions of the rule, if the variance proposal meets or exceeds the objectives of the rule.52 There is no formalized process in the regulations for how they will reach these agreements. Under the final rule, a decision on a variance request is not subject to administrative appeal either to the State Director or under 43 C.F.R. part 4.53

46 Id.; Final Rule, Section 3162.3-3(j). 47 Final Rule, Section 3162.3-3(j)(5). 48 Final Rule, Section 3162.3-3(j)(3). 49 Final Rule, Section 3162.3-3(k)(1). 50 Id. 51 Final Rule, Section 3162.3-3(k)(2); Final Rule at 197. 52 Final Rule, Section 3162.3-3(k)(2). 53 Final Rule, Section 3162.3-3(k).

©2015 Vinson & Elkins LLP www.velaw.com 7 Estimated Cost

BLM estimates that the compliance cost will be about $11,400 per operation, or about $32 million per year.54 According to BLM, this equates to approximately 0.13 to 0.21 percent of the cost of drilling a well. This figure is similar to the figure given for the 2012 proposed rule (about $11,833), but higher than the estimations ranging from $3,138 to $5,110 per operation in the 2013 proposal. A large portion of these costs are related to new requirement to store recovered fluids in above-ground tanks, which BLM anticipates will be largely borne by only a small sub-set of operators in states that do not already require tanks, and where the volume of recovered fluids is particularly high.55 For these operators, the new tank requirement will add an incremental cost per operation of $74,400.56 BLM explained that steel tanks would cost less than lined pits for jobs where the volume of recovered fluids is less than 32,368 bbl, whereas lined pits would cost less for jobs where the volume of recovered fluids is greater than 32,368 bbl.57 BLM anticipates that these additional costs will most likely effect operators in Arkansas, Louisiana, Mississippi, Ohio, Oklahoma, and Pennsylvania, where less than one percent of oil and gas activities occur on public lands.58 BLM also noted that many operators have already taken steps to comply with the rule’s requirements voluntarily or as a result of state-level regulations.59

For further information, please contact Vinson & Elkins lawyers Larry Nettles, Jay Rothrock, or Corinne Snow.

This paper is intended for educational and informational purposes only and does not constitute legal advice or services. If legal advice is required, the services of a competent professional should be sought. These materials represent the views of and summaries of the authors, and do not necessarily reflect the opinions or views of Vinson & Elkins LLP or of any of its other attorneys or clients. It is not guaranteed to be correct, complete, or current, and it is not intended to imply or establish standards of care applicable to any attorney in any particular circumstance.

54 Final Rule, at 278. 55 Final Rule at 302-7. 56 Final Rule at 307. 57 Final Rule at 302-3. 58 Final Rule at 318. 59 Final Rule, at 317.

©2015 Vinson & Elkins LLP www.velaw.com 8 BLM Seeks Public Comments on Whether to Revise Royalty Rates, Rental Payments, Bonding Requirements, and Penalties for Onshore Oil and Gas Drilling on Federal Lands

V&E Shale Insights — Tracking Fracking E-communication, April 30, 2015

On April 21, 2015, the Bureau of Land Management (BLM) published an advance notice of proposed rulemaking (ANPR) seeking guidance on whether to amend a number fiscal policies related to oil and gas leasing on federal lands, many of which have not been updated for decades. Specifically, BLM has asked whether it should (1) increase the royalty rates for new competitive bids on non-Indian lands from the current rate of 12.5 percent; (2) increase annual rental payments; (3) increase the minimum acceptable bid from its current rate of $2 per acre; (4) increase the lease bonding requirements; and (5) increase the civil penalties for trespassing in or unauthorized drilling on federal onshore oil and gas leases, refusing to allow BLM inspection, or providing false information. BLM has not yet suggested new amounts for any of these areas. Instead, it will accept public comments for a 45-day period on whether and how it should revise its regulations.

Background

BLM is tasked with overseeing the leasing process for more than 700 million sub-surface acres of mineral estate under federal and Indian lands. Under the Federal Onshore Oil and Gas Leasing Reform Act of 1987, BLM administers a two-tiered bidding system. BLM must first offer lands eligible for leasing in a competitive bidding process where it awards leases to the highest qualified bidder. Any eligible lands that do not receive qualified bids through the competitive bidding process are then offered for lease on a non-competitive basis for the subsequent two years. BLM reports that in 2014, 90 percent of leases were issued through the competitive process. After successfully bidding on a parcel, lessees pay the government a fixed annual rental payment based on the number of acres that they lease, as well as a 12.5 percent royalty from the oil and gas produced on the lease.

BLM has now issued an ANPR asking whether it should make changes to its current leasing program. In this ANPR, BLM seeks public feedback on five main topics: royalty rates, rental payments, minimum bids, bonding requirements, and civil penalties. For each of these areas, the BLM rules are currently set at the minimum amount allowed by statute. As a result, any revisions to BLM rules will increase costs to lessees, sublessees, and operators.

Royalty Rates

Under the Mineral Leasing Act of 1920, as amended (30 U.S.C. §§ 181 et seq.) (Mineral Leasing Act), and other statutes, BLM must set royalty rates for non-competitive leases at 12.5 percent, and BLM has no power to change that amount. In contrast, the Mineral Leasing Act allows BLM to set a royalty rate of 12.5 percent or greater for competitive leases. Although not required by statute, current BLM regulations also mandate a 12.5 percent royalty rate for all competitive

©2015 Vinson & Elkins LLP www.velaw.com 1 leases. The ANPR suggests that BLM would like greater flexibility in setting the rate by amending its regulations. Any changes would apply only to new competitive leases after the issuance of a final rule, and would not apply to leases on Indian lands. There are a number of indications in the ANPR that BLM would like to raise the royalty rate, which it has not done since the 1920s. The ANPR reports that the Government Accountability Office (GAO) has been following this issue for a number of years. A 2013 GAO report highlighted the fact that BLM has raised its offshore royalty rate to 18.75 percent without adjusting the onshore rate. The GAO also conducted a survey of countries that allow drilling on public lands and concluded that the United States receives one of the lowest percentages in government revenue from public oil and gas resource development in the world. The ANPR also includes a chart listing a number of states that charge higher royalty rates (usually ranging from 16.67-25 percent).

BLM is seeking guidance on how it would set a new rate, including whether that rate should be fixed or adjustable. For example, BLM is seeking feedback on a GAO suggestion that it consider a sliding-scale royalty rate structure based on an established index of oil and gas prices during a given period of time. The ANPR also indicates that BLM is considering establishing different royalty rates or rate schedules for new leases by region, State, lease sale, formation, or resource type. Alternatively, BLM asks whether it should revise its regulations so that the agency has the authority to set the royalty rate terms for new leases outside of a formal rulemaking process, such as in individual notice of lease sale documents.

Annual Rental Payments

The annual payments are currently set by BLM regulation at $1.50 per acre per year for the first through fifth years of the lease and at $2 per acre per year thereafter. These rental payments reflect the lowest amounts that BLM may charge under the Mineral Leasing Act. BLM has not raised rental payments since 1987, and is considering alternatives for both the amount and the method of setting the payment price. The ANPR notes that BLM is particularly interested in information about the rental rates charged by States and private landowners for acreage leased, but not yet producing.

Minimum Acceptable Bid

The Mineral Leasing Act requires BLM to accept the highest bid from a responsible qualified bidder which is equal to or greater than the national minimum acceptable bid. The Mineral Leasing Act sets the minimum bid at $2 per acre, but leaves discretion for BLM to raise that amount in the future. The ANPR notes that BLM is interested in raising the minimum bid, but also recognizes that it has an interest in ensuring that the minimum acceptable bid is not set so high as to result in no competitive bids, because those same leases would then become available for non-competitive leasing for the following two years. As noted above, BLM would have no power to charge a higher royalty rate for parcels leased through the non-competitive process.

©2015 Vinson & Elkins LLP www.velaw.com 2 Bonding

BLM regulations currently set four different bonding types, and BLM has not revised the minimum bonding amounts since 1960. BLM notes that these requirements likely no longer cover the costs associated with reclamation and restoration of oil and gas activities, and anticipates updating these amounts. BLM has requested public comments regarding the current costs of reclamation and restoration, whether it should set bond amounts uniformly or on a case- by-case basis, and possibly adding a new bond for inactive wells and unpaid royalties.

Civil Penalties

BLM’s civil penalties are all capped by BLM regulations, and BLM now anticipates raising these levels. BLM is authorized to assess fines when parties trespass and conduct unauthorized drilling on BLM lands. The civil penalties for failure to comply with the laws and regulations governing leasing, or the terms of any lease, are currently capped at $500 per violation per day. These penalties begin to accrue after BLM issues a notice of violation, and can be assessed unless the violation is cured within 20 days. The maximum daily penalty can increase up to $5,000 per violation per day if no corrective action is taken after 40 days, with a maximum total cap of $300,000. For parties who knowingly or willfully drill a well into leased land for which they are not the operator or lessee, the maximum penalty is $500,000.

For parties that refuse to allow BLM to enter and inspect, there are separate penalties of up to $10,000 per violation per day, capped at $200,000. In addition, the current penalties for knowingly or willfully preparing or submitting false, inaccurate, or misleading reports or information or for knowingly or willfully taking, removing, or diverting oil or gas from any lease site without valid legal authority are $25,000 per day, capped at $500,000. Given that BLM recently issued a final rule on hydraulic fracturing that requires additional reporting requirements to the agency, this last category of penalties could become increasingly important.

Conclusion

Revisions to the BLM leasing rules could have significant financial implications for companies interested in new federal leases. While BLM still appears to be in the early stages of considering whether to revise its rules, both the language in the ANPR and the fact that the GAO has long been following these issues suggest that BLM is likely to take further action.

For further information, please contact Vinson & Elkins lawyers Larry Nettles, George Wilkinson, Jay Rothrock, or Corinne Snow.

This paper is intended for educational and informational purposes only and does not constitute legal advice or services. If legal advice is required, the services of a competent professional should be sought. These materials represent the views of and summaries of the authors, and do not necessarily reflect the opinions or views of Vinson & Elkins LLP or of any of its other attorneys or clients. It is not guaranteed to be correct, complete, or current, and it is not intended to imply or establish standards of care applicable to any attorney in any particular circumstance.

©2015 Vinson & Elkins LLP www.velaw.com 3 EPA Hydraulic Fracturing Study Finds No Evidence of Widespread Systemic Impacts on Drinking Water Resources

V&E Shale Insights — Tracking Fracking E-communication, June 11, 2015

On June 4, 2015, EPA released its long-anticipated draft assessment of the impacts of hydraulic fracturing operations on drinking water resources. After three years of study, and nearly a thousand pages of analysis, EPA concluded that there was no evidence that these operations have had a “widespread, systemic impact” on surface or groundwater (emphasis added). Notably, EPA did not identify any instances where fluids migrated from the factures made in rock formations more than a mile below the surface up into aquifers that could be potential sources of drinking water. Instead, the draft report concluded that impacts appear to be limited to a small number of water supply wells, relative to the number of hydraulically fractured oil and gas production wells, and as explained below, the impacts do not appear to be specifically related to the injection process. Although EPA emphasized potential gaps in the available data, such as a lack of data associated with potential below-ground impacts and inconsistently collected local water quality data, the draft report indicates that the few instances of documented groundwater impacts were most often the result of surface-level spills or other wastewater treatment issues.

EPA’s assessment focuses on five ways in which hydraulic fracturing operations could affect drinking water resources: (1) water acquisition, (2) chemical mixing, (3) well injection, (4) flowback and produced water, and (5) wastewater treatment and waste disposal. The study broad focused broadly on all “drinking water resources,” a term which includes any water that could conceivably be used for drinking water at some point in the future, rather than just sources of water that are currently sources of drinking water. As summarized below, the draft assessment found little, if any, support for some of the biggest concerns that critics of hydraulic fracturing typically raise.

Impacts on Water Availability

The draft report stated that hydraulic fracturing operations currently account for less than 1 percent of annual water use in the U.S. In EPA’s view, these operations can have localized impacts on water availability in places with relatively high fracturing water use and low water availability, such as the Eagle Ford Shale in Texas. The draft assessment did not, however, find widespread impacts on the availability of drinking water. The report indicates that about 5 percent of the water currently used in hydraulic fracturing operations is recycled from previous fracturing treatments and that the available data suggests that this percentage is increasing, although the agency’s estimate appears to be low and potentially outdated given other data cited in the draft assessment, such as an estimated 70-90 percent wastewater recycling rate in Pennsylvania.

Water Contamination

EPA found only limited instances where the chemical components of hydraulic fracturing fluids had impacted surface or groundwater. In some instances, hydraulic fracturing fluids or produced

©2015 Vinson & Elkins LLP www.velaw.com 1 flowback wastewater have been spilled on the surface before or after an operation. The data available suggested that such spills are fairly infrequent, with estimates ranging from 0.4 to 12.2 spills of produced water per 100 wells. EPA concluded that these spills stemmed largely from human error, and equipment and container integrity failures.

When these fluids spill on the surface, they can potentially reach a body of water either through overland flow, or by migrating from the soil into groundwater. According to the draft assessment, the likelihood that chemicals contained in spilled fluid will impact groundwater is influenced by a number of factors, including the volume, timing, and composition of the spill. Groundwater impacts become more likely as the volume of the spill, the duration of the release, and the concentration of substances in the spilled fluid increase.

The draft assessment also reports findings related to two types of surface spills: spills of fracturing fluids, and spills of produced water. EPA’s study of 151 spills involving fracturing fluid indicated that the fluids reached surface water in only 9 percent of cases, and reached soil in 64 percent of cases. None of the fracturing fluid spills were reported to have reached groundwater. EPA also found that only 8 percent of produced water spills included in its study reached surface water or groundwater. The risks posed by these spills are similar to spills of crude oil or other fluids from traditional oil and gas operations, which also have the potential to affect surface water or groundwater by migrating through soils.

Notably, EPA did not identify any instances where fluids migrated from the factures made in rock formations more than a mile below the surface up into aquifers that could be potential sources of drinking water. This is consistent with several recent university and government-sponsored studies that have examined the potential vertical migration of fluids from depth to groundwater and reached this same conclusion.

Instead, the draft assessment suggested that there are several other possible avenues for fracturing fluids or produced water to reach drinking water supplies. In the handful of incidents in which EPA reported that subsurface aspects of hydraulic fracturing may have affected a potable aquifer, it appears that well casing failures, rather than the fracturing operation itself, were the cause of the problem. The risk posed by inadequate well casings is already well-understood by operators, and it is not specific to hydraulic fracturing wells. EPA also suggested that there are greater risks from fracturing older wells than from drilling new ones, due to casing degradation and the potential that older wells may not have been designed or tested to present-day specifications. Such findings may be of particular interest to operators since refracturing is expected to increase in the short- to medium-term. The draft assessment also cited unlined wastewater storage pits or inadequate wastewater treatment as possible sources of impacts on drinking water resources.

EPA determined that any risks related to possible drinking water contamination should be assessed on a local or regional, rather than a national, scale. The draft report described how operators use a wide variety of chemicals in different fracturing fluids, and that the use and occurrence of such chemicals differs widely from basin-to-basin, and, in some instances, even well-to-well. EPA encouraged use of the hazard evaluation methods it set forth in the draft

©2015 Vinson & Elkins LLP www.velaw.com 2 assessment on a regional or site-specific basis. However, EPA perceives there to be a lack of toxicity information on many of the chemicals used in fracturing fluid is a key data limitation, and contributing to greater uncertainty in any risk assessment.

Wastewater Treatment

The draft report highlighted a number of issues related to current treatment practices for the wastewater that result from hydraulic fracturing operations. Operators currently employ a number of methods of dealing with these fluids. The most common methods include disposal in underground injection wells (“UIC” or disposal wells), through evaporation ponds, treatment at centralized waste treatment (“CWT”) facilities followed by reuse or by discharge to either surface waters or publicly owned treatment works (“POTWs”), reuse with minimal or no treatment, and land application or road spreading (typically for dust suppression). Although the degree to which these methods are used varies by region, UICs are the primary method of disposal in most areas. The draft assessment does not address impacts to drinking water resources that might be associated with high volume disposal into these injection wells.

The draft assessment notes that CWTs and POTWs may not be able to remove all of the substances in the wastewater. For example, the draft assessment found that POTWs using basic treatment processes are not designed to effectively reduce total dissolved solids (“TDS”) concentrations in highly saline wastewater, although they can remove specific constituents such as metals, oil, and grease. CWTs with advanced wastewater treatment options such as reverse osmosis, thermal distillation, or mechanical vapor recompression, are able to reduce TDS concentrations and treat contaminants known to be in hydraulic fracturing wastewater. The draft assessment notes, however, there is limited data on the composition of hydraulic fracturing wastewater, and it is unknown whether advanced treatment systems are effective at removing constituents that are generally not subject to testing. Although EPA found no evidence of radionuclide contamination in drinking water intakes due to inadequately treated hydraulic fracturing wastewater, the draft assessment did note that CWTs and POTWs may not be able to adequately remove these substances.

The concerns related to both disposal wells and the ability of CWTs and POTWs to adequately treat hydraulic fracturing wastewater may lead regulators to take additional measures to encourage water recycling. For example, according to the draft assessment, 70-90 percent of hydraulic fracturing wastewater is currently reused in Pennsylvania. In recent years, Texas and Colorado have also eased regulatory requirements associated with wastewater recycling to encourage broader use of the practice.

Conclusion

Although EPA declined to state conclusively that the public’s drinking water supplies are not being adversely affected by hydraulic fracturing activities, the draft results of EPA’s assessment of the available data did not provide any evidence of widespread, systemic impacts on drinking water resources in the United States. EPA found no evidence that hydraulic fracturing fluids migrate up from the depths where hydraulic fracturing occurs into the more shallow areas where

©2015 Vinson & Elkins LLP www.velaw.com 3 aquifers are found. Moreover, when impacts to soils or groundwater occur, they are not caused by practices that are unique to hydraulic fracturing but instead originate from problems with casing or the management of hydraulic fracturing fluids or produced water on the surface near the drill site. In these respects, EPA’s multi-year study is consistent with what the industry has known for some time but fails to note all the many improvements made by industry in the intervening period while EPA was conducting its study. EPA’s failure to identify any significant contamination resulting from hydraulic fracturing activities means that this assessment is not likely to serve as a springboard for pervasive federal regulation of hydraulic fracturing.

EPA’s conclusions are not yet final, and the draft assessment remains subject to public review and comment and peer review by EPA’s Science Advisory Board (“SAB”). EPA will issue a final report following completion of the public comment and SAB review processes.

For further information, please contact Vinson & Elkins lawyers Larry Nettles, Casey Hopkins, Sue Snyder, Corinne Snow, or Jay Rothrock.

This paper is intended for educational and informational purposes only and does not constitute legal advice or services. If legal advice is required, the services of a competent professional should be sought. These materials represent the views of and summaries of the authors, and do not necessarily reflect the opinions or views of Vinson & Elkins LLP or of any of its other attorneys or clients. It is not guaranteed to be correct, complete, or current, and it is not intended to imply or establish standards of care applicable to any attorney in any particular circumstance.

©2015 Vinson & Elkins LLP www.velaw.com 4 EPA Issues Proposed Rule Prohibiting Disposal of Shale Wastewater at Public Treatment Facilities

V&E Shale Insights — Tracking Fracking E-communication, April 7, 2015

The U.S. Environmental Protection Agency (EPA) published a proposed rule on April 7, 2015,1 that will prohibit the disposal of unconventional oil and natural gas extraction wastewater2 (shale wastewater) at publicly owned treatment works (POTWs). The proposed rule is part of EPA’s broader effort to regulate hydraulic fracturing and specifically responds to concerns that POTWs are ill-equipped to treat the salts, minerals, and radionuclides sometimes found in shale wastewater.

Background

The Clean Water Act (CWA) regulates discharges of pollutants from point sources into waters of the United States through National Pollutant Discharge Elimination System (NPDES) permits or delegated state permits. Except in limited circumstances, CWA regulations prohibit discharges of wastewater from onshore oil and gas extraction facilities. This “zero discharge” requirement means that a NPDES permit (or state delegated permit) may not be issued to authorize the discharge of oil and gas wastewater to waters of the United States.

Since NPDES permits are difficult to obtain, operators have turned to other techniques to manage shale wastewater, most commonly by injection into underground formations that do not contain potable water. However, in locations such as Pennsylvania, where geological constraints limit the number of underground disposal wells, operators have occasionally sent shale wastewater to centralized wastewater treatment facilities (CWTs) or POTWs.3 Oil and gas operators are not required to obtain a NPDES permit to send wastewaters to these facilities. Rather, these “indirect discharges” are subject to the CWA’s general pretreatment standards, including a general requirement not to introduce pollutants that would “pass through” or “cause interference” with the facilities’ operations.

Currently, the CWA does not include pretreatment standards for indirect discharges of shale wastewater, and regulation has largely been left to the States. In 2011, however, incidents in

1 Effluent Limitations Guidelines and Standards for the Oil and Gas Extraction Point Source Category, 80 Fed. Reg. 18,557 (proposed Apr. 7, 2015) (to be codified at 40 C.F.R. pt. 435). 2 EPA proposes to define unconventional oil and gas extraction wastewater to include the following sources: produced water (including flowback and long-term produced water), drilling wastewater (including pollutants from drill cuttings and drilling muds), and produced sands. 3 Centralized wastewater treatment facilities that accept shale wastewater may either: (1) return treated water to an operator for reuse to fracture another well (“zero discharge”); (2) directly discharge treated water to surface waters (pursuant to an NPDES permit); or (3) indirectly discharge treated water to POTWs. According to data surveyed by EPA, there are 73 commercial CWT facilities that accept shale wastewater. EPA found that the number of CWT facilities available to operators in the Marcellus and Utica Shale formations has increased with the number of wells drilled, and observed a similar trend in the Fayette Shale formation in Arkansas.

©2015 Vinson & Elkins LLP www.velaw.com 1 Pennsylvania revealed that some POTWs had failed to adequately treat shale wastewater before discharging it into streams. In response to an EPA inquiry, Pennsylvania sought a voluntary commitment from industry that it would no longer send wastewater from the Marcellus Shale region to POTWs. EPA then issued a memorandum to state and federal permitting authorities that identified potential constituents of concern present in wastewater produced from the Marcellus Shale. EPA noted that most conventional POTWs were not equipped to remove the total dissolved solids (salts), metals, and radionuclides that are sometimes found in shale wastewater. The agency also observed that some POTWs reported experiencing operational difficulties while processing wastewater that contained high concentrations of these constituents.

In October 2011, EPA announced its intention to develop new pretreatment standards for shale wastewater deliveries to POTWs. EPA indicated that the pretreatment standards would require operators to follow national technology-based regulations, rather than simply meeting local limits applicable to POTWs. EPA also stated that the pretreatment standards would not apply to re- injection or re-use of flowback water, the two most common techniques for handling hydraulic fracturing wastewater.

EPA’s Proposed Rule

EPA proposes to establish a zero discharge requirement for new and existing unconventional oil and natural gas extraction facilities4 that will prohibit operators from discharging shale wastewater through POTWs. In practical terms, this means that shale wastewater that is discharged to POTWs will be regulated as if the wastewater were discharged directly into waters of the United States. According to EPA, this prohibition reflects the current industry practice of not sending wastewater to POTWs for treatment and disposal. EPA states that it is unaware of any facilities that are currently sending wastewater to POTWs. Nonetheless, EPA believes the proposed rule is necessary because shale wastewater has been discharged to POTWs in the past and operators could request that POTWs treat their wastewater in the future. EPA claims this rulemaking will provide regulatory clarity and relieve the burden on POTWs to evaluate any future requests.

The proposed zero discharge requirements apply only to wastewater sent to POTWs from onshore unconventional oil and gas extraction; EPA is not proposing pretreatment standards for wastewater pollutants associated with conventional oil and gas extraction facilities at this time, reserving such standards for a future rulemaking, if appropriate. Nor do the requirements address deliveries of produced water from coalbed methane formations; EPA previously stated that it would issue concurrent pretreatment standards for the coalbed methane sector, but those plans have been postponed indefinitely. Finally, the proposed rule does not prohibit deliveries to CWTs, although EPA says that it will consider whether to revise existing regulations for wastewater deliveries to those plants in a future rulemaking effort.

4 EPA proposes to define “unconventional oil and gas” (UOG) as “crude oil and natural gas [including natural gas liquids] produced by a well drilled into a low porosity, low permeability formation (including, but not limited to, shale gas, shale oil, tight gas, tight oil).”

©2015 Vinson & Elkins LLP www.velaw.com 2 Although EPA’s proposed rule would prohibit industry from using POTW capacity to handle shale wastewater, it may present opportunities for equipment and service companies that offer flowback treatment or recycling equipment and services. The proposed rule could also boost CWTs that are capable of treating shale gas wastewater to levels that achieve receiving water standards. That said, the proposed rule’s impact on U.S. shale development overall may be limited because the POTW issue is generally confined to the Marcellus Shale region. As mentioned previously, in 2011, Pennsylvania moved to stop shale wastewater discharges to POTWs. In Ohio, the Division of Natural Resources has regulatory authority over the disposal of oil and gas wastewater (including flowback). However, the agency has interpreted Ohio Revised Code § 1509.22(C)(1), which regulates storage of wastewater from oil and gas operations, to strictly limit disposal options, going so far as to say that it will not authorize discharges of gas well wastewater through POTWs.5

Due in part to these restrictions, as well as advances in treatment technologies, the Marcellus Shale region has seen a rapid rise in wastewater recycling (either by treatment at the wellhead or via deliveries to a CWT). Since 2010, oil and gas wastewater recycling in Pennsylvania has grown from 4.6 to over 7.8 million bbl per year, while wastewater reuse has increased from 2.6 to over 22 million bbl per year.6 It remains to be seen what effect EPA’s proposed pretreatment standards may have on the cost of disposing shale wastewater in other regions of the U.S.

Comments on this proposed rule must be received on or before June 8, 2015. EPA will also hold a public hearing on the rule on May 29, 2015, at agency headquarters in Washington, D.C. Operators who are concerned about the potential impacts of these new requirements are encouraged to participate in public hearings and the public comment process.

For further information, please contact Vinson & Elkins lawyers Larry Nettles, Sue Snyder, Jordan Rodriguez, or Jay Rothrock.

This paper is intended for educational and informational purposes only and does not constitute legal advice or services. If legal advice is required, the services of a competent professional should be sought. These materials represent the views of and summaries of the authors, and do not necessarily reflect the opinions or views of Vinson & Elkins LLP or of any of its other attorneys or clients. It is not guaranteed to be correct, complete, or current, and it is not intended to imply or establish standards of care applicable to any attorney in any particular circumstance.

5 See Patriot Water Treatment, L.L.C. v. Ohio Dep’t of Nat. Res., 2013-Ohio-5398. 6 See Water Recycling / Oil & Gas Waste Presentation, Mike Texter, Division of Reporting and Fee Collection, DEP (Jan. 15, 2015), http://www.dep.state.pa.us/dep/subject/advcoun/solidwst/2015/1-15- 15/Water_Recycling_and_Oil_and_Gas_Waste.pdf.

©2015 Vinson & Elkins LLP www.velaw.com 3

New Methane Regulations Proposed for the Oil and Gas Sector: What You Need to Know

V&E Shale Insights – Tracking Fracking E-communication

August 26, 2015

On August 18, 2015, EPA proposed a slate of rulemakings under the Clean Air Act (the “Act”) directed at the oil and gas industry. These rulemakings would, if promulgated along the lines proposed, achieve the following:

• establish New Source Performance Standards (“NSPS”) for methane and volatile organic compound (“VOC”) emissions from the oil and gas sector; • redefine the fundamental term “source” in a way that may add burdensome requirements, extend the time and permitting risks associated with permitting sources, and potentially require additional controls; and • require states to mandate additional pollution controls in states that are non-attainment for ozone, through Controls Technique Guidelines (“CTGs”) that states will be forced to implement. These rules will have widespread application to the oil and gas industry and could have impacts on production, processing, transmission, and storage vessels. Businesses and individuals concerned about this proposed rule or interested in participating in EPA’s decision making process have only 60 days after the proposed rule is published in the federal register to submit comments to the agency.

It is important to note that these changes — once adopted — will apply to any covered source built or modified after the Federal Register proposal date, regardless of when the rule is made final. Accordingly, owners and operators need to begin now to design and build their operations to comply with the performance requirements imposed by these proposed rules.

I. NSPS Proposal

Background

EPA explains that it released this proposal because methane has been determined by the agency to be a greenhouse gas (“GHG”), and the oil and natural gas category is currently one of the U.S.’s largest emitters of methane. EPA already has established standards for emissions of VOC and SO2 for several select operations in the oil and gas sector through regulations codified as “Subpart OOOO.” The Subpart OOOO regulations already resulted in a large reduction in methane emissions, even though they were not expressly mentioned, causing some to question whether this separate methane rule was necessary.

Still, EPA proposes to amend those regulations to include standards for reducing methane, as well as VOC emissions, across the oil and natural gas source category, which EPA defines to include production, processing, transmission and storage. This proposal would expand the existing VOC standards to cover additional equipment, and establishes new methane standards for equipment regulated under the 2012 rulemaking and the remainder covered by this regulation as well. The proposal would extend the current VOC best system of emission reduction (“BSER”) standards found in Subpart OOOO for VOC to methane emissions for the expanded list of equipment identified in the new rule.

This chart provides a comparison between the previous Subpart OOOO and the proposed changes:

Requirement Subpart OOOO Proposed Rule Regulates VOCs Yes Yes Regulates Methane No, but controls are identical to Yes those now required for methane Hydraulically fractured oil well No Yes completions Hydraulically fractured gas well Yes Yes completions

1

Requirement Subpart OOOO Proposed Rule Fugitive emissions at well sites No Yes and compressor stations Equipment leaks at natural gas Yes Yes plants Pneumatic Pumps and No Yes Controllers Control requirements BSER BSER (same controls)

How will this impact existing state regulation?

EPA acknowledges that states may already have more stringent requirements and suggests that affected sources already in compliance with those state requirements will also be in compliance with the proposed NSPS.

What are the costs of compliance?

Section 111 of the Act requires that EPA consider a number of factors, including cost, in determining the BSER standards. EPA estimates the total industry-wide capital cost of complying with the proposed NSPS will be $170 to $180 million in 2020 and $280 to $330 million in 2025. In addition, EPA estimates the total annualized engineering costs of the proposed NSPS to be $180 to $200 million in 2020 and $370 to $500 million in 2025 when using a 7 percent discount rate.

Despite these high industry-wide costs, EPA concludes that the proposed rule has a net economic benefit. To reach this conclusion, EPA considered the revenues that it expects operators will generate from selling the methane that would have otherwise been emitted into the atmosphere. EPA has valued the methane at about $4.00 per Mcf. EPA estimates that 8 billion cubic feet in 2020 and 16 to 19 billion cubic feet in 2025 of natural gas will be recovered by implementing the NSPS. Especially given the current state of the market, these estimates are speculative.

EPA’s conclusion also is based partially on its use of a model called the Social Cost of Methane. EPA used this model to place a present-dollar value on projected future benefits to the climate from reducing methane emissions. Based on the model and the three percent discount rate that EPA used in the cost- benefit analysis, EPA determined that every ton of methane emissions that this rule prevents is worth $1,100 in 2015.

EPA projects that the proposed rule would prevent 170,000 to 180,000 tons of new methane emissions, 120,000 tons of new VOC emissions, and 310 to 400 tons of new hazardous air pollutants (“HAP”) emissions in 2020. The proposal estimates that these emission reductions would increase to 340,000 to 400,000 tons of methane, 170,000 to 180,000 tons of VOC, and 1,900 to 2,500 tons of HAP in 2025. As a result, EPA estimates the methane-related monetized climate benefits of the proposal to be $200 to $210 million in 2020 and $460 to $550 million in 2025. According to EPA’s calculations, in 2010 the total GHG emissions from U.S. oil and natural gas production, and natural gas processing and transmission accounted for 0.3 percent of the global GHG emissions.

II. Upstream Impacts

The proposal expands the VOC and methane standards to apply to hydraulically fractured oil well completions, and fugitive emissions from oil well completions—two sources of emissions not currently regulated under Subpart OOOO. Hydraulically fractured natural gas wells, which already are subject to the VOC regulations under Subpart OOOO, also would be subject to the new methane regulations, but these sources should be able to meet the methane emission requirements without additional upgrades or

2

controls. The proposed regulations would cover pneumatic controllers and pumps, as well as storage tanks at oil and natural gas well sites. In addition, EPA is requesting comments on technologies and techniques to reduce methane and VOC emissions during liquids unloading operations. These sources are not currently covered by Subpart OOOO and would need to come into compliance.

Well completions

The proposed well completion operational standards are the same as the current Subpart OOOO standards for natural gas wells, but would expand the rule to also cover oil wells with a gas-to-oil ratio of more than 300 standard cubic feet (scf).

For subcategory 1 wells (non-wildcat, non-delineation wells)1 the proposal would require owners and/or operators to use reduced emission completions (also referred to as “RECs” or “green completions”) to reduce methane and VOC emissions in combination with a completion combustion device, such as flares or controlled combustion control devices to prevent emissions when the gas is not salable. RECs use a separator to remove gas and liquid hydrocarbons from the flowback so that the gas and hydrocarbons can then be treated and used or sold. The proposal does not require RECs where the use of a separator is technically infeasible. For subcategory 2 wells (wildcat and delineation wells), the proposal would only require owners and/or operators to use a completion combustion device, and not RECs. Well completions done as part of a refracturing operation are not subject to this portion of the proposal as long as they meet the current Subpart OOOO requirements, but may still be subject to fugitive emissions requirements.

The proposal would require gas controls during and after the second flowback stage (the “separation flowback stage”) to begin when the separator can function. During this stage, all salable quality gas must either be collected, re-injected, or used either for on-site fuel or for another useful purpose. If it is technically infeasible to route the gas in this way, or if the gas is not of salable quality, the operator must combust the gas unless combustion creates certain fire, safety, or environmental hazards, and the proposal does not allow direct venting of gas during the separation flowback stage. During the initial and second flowback stages, all flowback liquids must be routed to a well completion vessel, a storage vessel or a collection system.

For subcategory 2 wells, the proposal would require routing of the flowback into well completion vessels and commencing operation of a separator unless it is technically infeasible for the separator to function. Once the separator can function, recovered gas must be captured and directed to a completion combustion device unless combustion creates a fire, safety, or environmental hazard. As with the current Subpart OOOO standards, low pressure wells would also be subject to these subcategory 2 requirements.

In addition to these specific requirements, the proposed rule places a general duty on operators “to safely maximize resource recovery and minimize releases to the atmosphere during flowback and subsequent recovery.” This vague language could create potential compliance risks for operators.

Fugitive Emissions

What equipment and wells would be regulated?

The proposed rule would regulate the collective fugitive emissions from the “well site” — defined as “one or more areas that are directly disturbed during the drilling and subsequent operation of, or affected by,

1 Wildcat wells, also referred to as exploratory wells, are wells drilled outside known fields or are the first wells drilled in an oil or gas field where no other oil and gas production exists. Delineation wells are wells drilled to determine the boundary of a field or producing reservoir. Well completions done as part of a refracturing operation are not subject to this portion of the proposal as long as they meet the current Subpart OOOO requirements, but may still be subject to fugitive emissions requirements.

3

production facilities directly associated with any oil well, gas well, or injection well and its associated well pad” — including all ancillary equipment in the immediate vicinity of the well that is necessary for or used in production, such as separators, storage vessels, heaters, dehydrators, or other equipment at the site. The requirements would apply to all new wells site, or sites modified after effective date of the final rule.

The proposed rule would not cover:

• Low production well sites where the combine oil and natural gas production for the wells at the site is less than 15 barrels of oil equivalent (boe) per day averaged over the first 30 days of production • Existing well sites where additional drilling activities other than fracturing or refracturing (such as well workovers) are conducted on an existing well In addition, well sites that only contain wellheads without ancillary equipment are not subject to the fugitive emissions monitoring requirements.

What requirements would apply?

Under the new proposed rule, EPA will require fugitive emissions surveys with optical gas imaging (“OGI”) technology for new and modified well sites, as well as compressor stations. The proposal would require operators to conduct an initial survey within 30 days of commencing operation and semi-annual follow-up surveys. The proposal would require operators to replace or repair the sources of any detected fugitive emissions “as soon as practicable, but no later than 15 days after detection.” All sources of fugitive emissions that are repaired must then be resurveyed within 15 days of repair completion to ensure the repair has been successful. Operators would be required to develop and implement company-wide monitoring plans to comply with these fugitive emission requirements.

The initial OGI survey of “fugitive emissions components” at the well site would include valves, connectors, open-ended lines, pressure relief devices, closed vent systems and thief hatches on tanks. For new sites, the initial survey would have to be conducted within 30 days of the end of the first well completion or upon the date the site begins production, whichever is later. For modified well sites, the initial survey would be required to be conducted within 30 days of the site modification. A modification occurs whenever a new well is added to the site, or anytime an existing well at the site is fractured or refractured.

Under the proposal, the survey frequency would decrease from semiannually to annually for sites that find fugitive emissions from fewer than one percent of their fugitive emission components during two consecutive surveys, but the frequency would increase from semiannually to quarterly for sites that find fugitive emissions from three percent or more of their fugitive emission components during two consecutive surveys. Monitoring frequency would continue to increase and decrease depending on the results of subsequent surveys. EPA is also considering a far more labor intensive and time consuming monitoring process, known as EPA Method 21.2

EPA is also requesting comments on criteria to evaluate corporate fugitive emission monitoring plans that could be deemed to meet the equivalent of its proposed standards as an alternative means of complying with its final rule. Companies with good internal fugitive policies may be able to reduce their compliance burdens by submitting thoughtful comments to EPA to encourage the agency to allow for these policies to serve as a way to comply with the proposed rule.

2 Method 21 is a procedure used to detect VOC leaks for process equipment using a portable detecting instrument. Monitoring intervals vary accordingly to the applicable regulation, but are typically weekly, monthly, quarterly, and yearly. The monitoring interval depends on the component type and periodic leak rate for the component type.” EPA, Leak Detection and Repair: A Best Practices Guide (2007), available at http://www2.epa.gov/sites/production/files/2014-02/documents/ldarguide.pdf

4

Record-keeping and Reporting

The proposal also contains record-keeping requirements related to the flowback time periods, and the total duration of venting, combustion and flaring over the flowback period for both subcategories of wells. The owner or operator would also be required to keep at least one digital photograph of each affected well site or compressor station for each monitoring survey, as well as logs with monitoring data related to fugitive emissions. In addition, the rule requires affected facilities to file an annual report consistent with the current requirements found in Subpart OOOO. In the proposal, EPA recognizes that this proposal could create duplicative recordkeeping and reporting requirements with Subpart W (requiring the monitoring and reporting of GHG emissions) and other state and local rules. EPA is soliciting comments on how it can minimize recordkeeping and reporting burden.

III. Midstream Impacts

The proposed NSPS provisions targeting the midstream business apply to compressor seals and compressor station fugitive emissions.

Standards for Centrifugal and Reciprocating Compressors

The proposed rule requires wet seal centrifugal compressors across the source category (except those located at a well site) to achieve 95 percent control efficiency by capturing and routing VOC and methane emissions to a combustion control device. Alternatively, the proposed rule will allow centrifugal compressors to use dry seal systems—which EPA determined to have substantially lower emissions than wet seal systems—or capture gas from centrifugal compressor seals and route it back to a low pressure fuel gas system.

For reciprocating compressors across the source category, EPA proposes an operational standard that will require owners or operators to replace rod packing systems every 26,000 hours of operation or every 36 months. As an alternative to rod packing replacement, the proposed rule would allow routing of emissions from the rod packing through a closed vent system under negative pressure. However, this technology may not be applicable to every installation, so EPA will allow operators to choose the control option for a particular application.

Fugitive Emissions (Compressor Stations)

As with the covered well sites, new and modified compressor stations across the source category (including the transmission and storage segment and the gathering and boosting segment) will be required to conduct semi-annual monitoring surveys using OGI and a resurvey using EPA Method 21. For purposes of the fugitive emissions provisions of the proposed standards, a modification occurs when one or more compressors is added to a compressor station after the effective date of the final rule, or when a physical change is made to an existing compressor that increases compressor capacity.

Any repairs needed must be completed within 15 calendar days and a resurvey of the compressor completed within 15 days of the repair. EPA has asked for comment whether this monitoring should be of the compressor or the facility as a whole. EPA believes that most regulated companies will contract for the performance of these surveys with contractors who are knowledgeable about OGI and have their own equipment. EPA is concerned that there may not be enough contractors and has requested comment on this point. EPA’s proposed rule would relax the required frequency of subsequent surveys if the data shows fugitive emissions from less than one percent of their components. Conversely, the frequency would increase from semiannually to quarterly for sites that find fugitive emissions from three percent or more of their components.

5

The proposed rule defines the term “fugitive emission component” and includes a long list of components the operator must monitor, including valves, connectors, open-ended lines, pressure relief devices, closed-vent systems, and thief hatches on tanks. Equipment that vents natural gas as part of its normal operation is not considered “leaking” and is exempt. Operators will be required to repair any leaks discovered during the survey within 15 days, unless the repair would require shutting down production. If shutdown is required, then operators must repair any leaks during the next scheduled shutdown or within 6 months, whichever is earlier.

Requests for Comments

EPA is specifically requesting comments regarding a number of aspects of the proposed fugitive emissions requirements for compressors. Among the areas where EPA is specifically seeking comments are whether to adjust the baseline leak monitoring survey interval from semi-annually to annually or quarterly. In addition, EPA notes that Subpart W already requires certain compressor stations that emit more than 25,000 metric tons of CO2e to submit annual fugitive emissions reports and will take comments regarding any reducing overlap between those requirements. EPA has requested comments on whether operators can perform the initial leak monitoring surveys using EPA Method 21 instead of OGI. EPA asked for comments on how voluntary, corporate leak detection programs could satisfy the requirements of the final rule.

IV. CTGs

Also on August 18, EPA issued draft Control Techniques Guidelines (“CTGs”) that, when finalized, will require states to consider imposing control requirements on existing oil and gas equipment in ozone nonattainment areas.

Section 182 of the Act requires states to revise their State Implementation Plans (“SIPs”) to include reasonably available control technology (“RACT”) requirements for existing sources of volatile organic compound (VOC, an ozone precursor) emissions in nonattainment areas. RACT is “the lowest emission limitation that a particular source is capable of meeting by the application of control technology that is reasonably available considering technological and economic feasibility.” A SIP is a state-adopted plan that demonstrates how a non-attainment area will achieve the national ambient air quality standards, such as the EPA’s standards for ozone.

These CTGs do not place any requirements on facilities. Instead, they serve as recommendations for state regulators to consider in setting RACT requirements for reducing VOC emissions in revised SIPs. States may use non-CTG technology and approaches, subject to EPA approval. The CTGs apply to pneumatic controllers, pneumatic pumps, compressors, equipment leaks and fugitive emissions in the onshore production and processing segments of the oil and natural gas industry, as well as storage vessels in all segments (except distribution) of the oil and natural gas industry. EPA considers the petroleum refining industry as separate from the oil and natural gas industry, so the CTGs do not apply to operations and equipment past the point of custody transfer at a petroleum refinery. Once EPA finalizes the CTGs, state regulators will have two years to submit SIP revisions to EPA for approval. EPA has not said when it intends to finalize the CTGs.

Because CTGs only apply in ozone nonattainment areas, the impact of these CTGs will be expanded when EPA finalizes its new ozone standard in October. If EPA drops the ozone standard from 75 ppb to between 65-70 ppb, as expected, EPA projects many areas of the country will be in non-attainment with the ozone standard for the first time. Eventually, there will be no limits to the coverage of existing sources based on ozone designations at all: Under Section 111(d) of the Act, EPA must issue existing source guidelines after it issues new source performance standards for “designated facilities,” such as upstream oil and gas facilities to be covered under the proposed rule. Although there is no fixed deadline for doing so, no doubt litigation will lead to a court-ordered deadline.

6

For example, EPA’s draft RACT recommendation for storage vessels is a 95 percent reduction of VOCs from sources with a potential to emit greater than or equal to 6 tons per year annually. If that sounds identical to EPA’s 2012 new source performance standards applicable to the same equipment, that’s because it is: EPA acknowledged that some of its RACT recommendations mirror recent new source performance standards.

An overview of EPA’s draft RACT recommendations is below.

Emission Source Applicability RACT Recommendations 95 percent reduction of VOC emissions from storage vessels Storage Vessels Individual storage vessel. with a potential to emit (PTE) greater than or equal to 6 tpy.

Natural gas bleed rate of zero scfh (unless there are functional Individual continuous bleed, needs, including but not limited to natural gas-driven pneumatic response time, safety and controller located at a natural gas positive actuation, requiring a processing plant. bleed rate greater than zero scfh). Pneumatic Controllers Individual continuous bleed Natural gas bleed rate less than natural gas-driven pneumatic or equal to 6 scfh (unless there controller located from the are functional needs, including wellhead to the natural gas but not limited to response time, processing plant or point of safety and positive actuation, custody transfer to an oil requiring a bleed rate greater pipeline. than 6 scfh).

Individual natural gas-driven chemical/methanol and Zero natural gas emissions. diaphragm pump located at a natural gas processing plant.

If there is an existing control device at the location of the pneumatic pump, reduce VOC Individual natural gas-driven emissions from each gas-driven Pneumatic Pumps chemical/methanol and chemical/methanol and diaphragm pump at locations diaphragm pump at the location other than natural gas processing plants from the wellhead to the by 95 percent or greater. point of custody transfer to the If there is no existing control natural gas transmission and device at the location of the storage segment. pneumatic pump, submit a certification that there is no device.

7

Emission Source Applicability RACT Recommendations Reduce VOC emissions by replacing reciprocating compressor rod packing after Individual reciprocating 26,000 hours of operation or 36 compressor located between the months since the most recent rod wellhead and point of custody transfer to the natural gas packing replacement. transmission and storage Alternatively, route rod packing segment. emissions to a process through a closed vent system under negative pressure.

Individual reciprocating compressor located at a well site, RACT would not apply. or an adjacent well site and Compressors (Centrifugal and servicing more than one well site Reciprocating) Individual centrifugal compressor using wet seals that is located Reduce VOC emissions from between the wellhead and point each centrifugal compressor wet of custody transfer to the natural seal fluid gassing system by 95 gas transmission and storage percent or greater. segment.

Individual centrifugal compressor using wet seals located at a well RACT would not apply. site, or an adjacent well site and servicing more than one well site.

Individual centrifugal compressor RACT would not apply. using dry seals.

Implement the 40 CFR part 60, subpart VVa leak detection and Equipment components in VOC repair (LDAR) program for Equipment Leaks service located at a natural gas natural gas processing plants processing plant. constructed or modified on or before August 23, 2011.

Individual well site with wells that Implement a semiannual optical produce, on average, greater gas imaging (OGI) monitoring than 15 barrel equivalents per and repair program. day per well.

Individual compressor station Fugitive Emissions located from the wellhead to the point of custody transfer to the Implement an OGI monitoring natural gas transmission and and repair program. storage segment or point of custody transfer to an oil pipeline.

8

V. Definition of “Source” and “Aggregation”

While other aspects of the EPA’s proposals would explicitly subject oil and gas operations to various emissions controls under the NSPS program, EPA’s source aggregation proposal would potentially subject these operations to the costly and time-consuming air permitting requirements for construction and operation. Uncertainty about whether to aggregate individual activities in the oil field as a single source for purposes of deciding wither their collective emissions exceed permit applicability thresholds has led to litigation, including challenges by non-governmental organizations to projects, such as in the Ultra Resources Inc. challenge in Pennsylvania.3 EPA is requesting comment on two approaches to defining what is a source for onshore oil and gas operations: one based solely on proximity, and another based on proximity within a certain distance and on functional interrelatedness beyond that distance. The more activities that EPA or state aggregate into a “source,” of course, the more likely it is to be “major.” EPA’s approach to source aggregation exposes these oil and gas operations to the risk of time- consuming permitting obligations, including extensive and costly analyses of emissions, and even more stringent pollution controls.

Background

EPA’s current permitting rules under the Act define a “source” as all activities (1) under common control, (2) within the same major industrial category, and (3) located on “contiguous or adjacent” properties. EPA is proposing to amend its Prevention of Significant Deterioration, Nonattainment New Source Review (“NSR”), and Title V program regulations to address its interpretation of adjacency, which courts have invalidated in a sequence of recent appellate court decisions. Over the years, various EPA memos and case-specific determinations had evolved the agency’s definition of adjacency to include all emitting activities that were “functionally related” to a source, regardless of how geographically apart such activities may be from one another. The Sixth Circuit, in Summit Petroleum Corp. v. U.S. Environmental Protection Agency,4 however, invalidated EPA’s approach in 2012, holding that it was contrary to the plain meaning of “adjacent.” Following this decision, EPA issued guidance calling for its “functional interrelatedness” test to be used in every state other than those in the Sixth Circuit (Kentucky, Michigan, Ohio, and Tennessee), but the D.C. Circuit invalidated that approach in 2014, holding that the guidance conflicted with EPA’s rules requiring consistency across regions.

In order to resolve the uncertainty created by these developments, EPA has co-proposed two options for source aggregation in the oil and gas industry:

EPA’s Preferred Option: Proximity

Under EPA’s “preferred” option, a “source” in the oil and gas industry would include all the emitting activities located on a property, and only those sources that “are contiguous or are located within a short distance of one another” would be considered “adjacent.” Under this option, EPA has proposed specifying that properties within a distance of ¼ mile should be considered a single source. This is the same distance within which certain states, including Texas, Pennsylvania, Oklahoma, and Louisiana, presume that operations should be considered a single source pursuant to state-issued guidance. EPA has requested comment on whether another distance, such as ½ mile, is more appropriate. A more troublesome question from EPA is whether it is appropriate to “daisy-chain” sources in the aggregation analysis; this artifice could extend the concept of a source quite broadly in geographic terms depending on how a project is structured. Louisiana has issued guidance stating that the aggregation analysis should not daisy-chain sources.

3 Citizens for Pennsylvania’s Future v. Ultra Resources, Inc., No. 4:11-CV-1360 (D. Md. Feb. 23, 2015). 4 690 F.3d 733 (6th Cir. 2012).

9

Option 2: Proximity Plus Functional Interrelatedness

Under EPA’s second option, an oil and gas “source” would again include all the emitting activities located on a property, and properties within a proposed distance of ¼ mile. Sources beyond a ¼ mile could still be considered a single source and their emissions aggregated based exclusively on their functional interrelatedness. To define this amorphous concept, EPA has proposed that functional interrelatedness “might be shown” by a physical connection, such as a pipeline between equipment. EPA also provided “other examples of factors” on which it might determine sources to be functionally interrelated; this list is not defined explicitly, but EPA has suggested that considerations such as the delivery of product from one group of equipment to another, or whether one group of equipment is dependent upon the operation of another, could be the basis of a finding of functional interrelatedness. EPA is also seeking comment on whether functional interrelatedness in the oil and gas sector should be limited to certain common configurations of equipment, such as a “hub and spoke” production model. Finally, EPA is seeking comment on whether there is a distance beyond which sources should not be aggregated, even if functionally interrelated.

Analysis

Even EPA acknowledged the permitting burden that would be placed on operators and regulating authorities in its source-definition proposal: “it takes significantly longer to apply for and review a PSD application than it does to apply for and review a minor NSR permit.” EPA estimates that a major source permit typically takes a year or more to process. Option 2 would be more time-consuming for permitting authorities, because it requires case-by-case determinations of the “functional interrelatedness” of sources separated by more than ¼ mile. Moreover, the outcome of such assessments remains highly uncertain, as it was under EPA’s past approach to source aggregation; indeed, EPA’s proposal does not specify a particular set of factors pursuant to which it proposes to assess functional interrelatedness. In addition to delays and higher costs, the ambiguity and case-by-case nature of the functional interrelatedness inquiry will also give non-governmental organizations an additional opportunity to challenge projects on criteria they may argue are determinative. Thus, permitting decisions under Option 2 would carry with them greater litigation risk, increasing uncertainty and the potential for delays.

VI. Conclusion

Upon publication in the Federal Register, EPA’s proposals will be subject to a 60-day comment period. EPA will also hold public hearings on its source aggregation proposal at dates and locations to be announced in a forthcoming notice. EPA has indicated that if the rule is adopted as proposed, many of its requirements will apply retroactively based on construction and modifications after the date on which the proposal is published in the Federal Register, rather than taking effect 60 days after the final rule is adopted. Affected parties are therefore strongly encouraged to submit comments during the upcoming public comment period.

For more information, please contact Vinson & Elkins lawyers Larry Nettles, George Wilkinson, Eric Groten, George C. Hopkins, Jay Rothrock, Corinne Snow, or one of the members of V&E’s Shale and Fracking and Environmental practice groups.

This paper is intended for educational and informational purposes only and does not constitute legal advice or services. If legal advice is required, the services of a competent professional should be sought. These materials represent the views of and summaries of the author, and do not necessarily reflect the opinions or views of Vinson & Elkins LLP or of any of its other attorneys or clients. It is not guaranteed to be correct, complete, or current, and it is not intended to imply or establish standards of care applicable to any attorney in any particular circumstance. Prior results do not guarantee a similar outcome.

10 The Frack Pack Strikes Back: Hydraulic Fracturing Legislation in the 114th Congress

V&E Shale Insights — Tracking Fracking E-communication, May 11, 2015

This spring, House and Senate Democrats proposed a suite of bills, known as the “Frack Pack,” attempting to expand federal regulation of hydraulic fracturing activities. The bills specifically target major environmental laws that provide exemptions for hydraulic fracturing and oil and gas production activities. These bills echo the themes of unsuccessful legislation proposed in prior Congresses. By contrast, several Republican lawmakers have introduced legislation that would limit the authority of the U.S. Department of Interior’s Bureau of Land Management (BLM) to regulate hydraulic fracturing on Federal and Indian lands. These bills are summarized below:

Legislation that Would Expand Federal Regulation of Hydraulic Fracturing

FRAC Act The Fracturing Responsibility and Awareness of Chemicals (FRAC) Act of 2015 (H.R. 1084 and S. 785)1 would remove the exclusion of hydraulic fracturing from the definition of “underground injection” in the Safe Drinking Water Act (SDWA) so that the U.S. Environmental Protection Agency (EPA) could regulate such injections through the SDWA’s Underground Injection Control (UIC) Program. In the 2005 Energy Policy Act, Congress excluded hydraulic fracturing from the UIC Program Class II requirements under the SDWA, except where diesel fuels are used in fracturing fluids or propping agents.2

In addition, the FRAC Act proposes to add a new provision to the SDWA that would require certain disclosures by operators or producers both before and after hydraulic fracturing operations. These disclosures would include a list of chemicals used in any underground injection during the operations. This list would include an identification of the chemical constituents of mixtures, Chemical Abstracts Service (CAS) numbers for each chemical and constituent, material safety data sheets when available, and the anticipated volume of each chemical to be used. Additionally, the bill would require that this information be made publically available online. The bill provides trade secret protection for chemical formulas. However, it would require immediate disclosure to medical personnel regardless of any asserted trade- secret claims in the event of an emergency.

1 The Senate bill was introduced by Sen. Robert Casey (D-PA). The House version was introduced by Rep. Diana DeGette (D-CO). 2 On February 11, 2014, the EPA published permitting guidance and an interpretive memorandum to clarify the existing legal requirements of the UIC Class II permit program. Together, these materials provide non-binding, technical recommendations for EPA Region, State, and Tribal authorities to consider when issuing Class II permits for hydraulic fracturing activities that use diesel fuels. The most important aspect of the new guidance is the EPA’s revised definition of “diesel fuel,” which the EPA defines with reference to five specific chemicals: CAS Registry Nos. 68344-30-5, 68476-34-6, 68476-30-2, 68476-31-2, and 8008-20-6. The guidance does not address other hydraulic fracturing activities using diesel range organics.

©2015 Vinson & Elkins LLP www.velaw.com 1 The FRAC Act has encountered consistent bipartisan opposition since previous versions were first introduced in 2009.3 The original bills were reported to standing committees in their respective houses of Congress, but neither bill was ever brought to a vote on the floor, even when Democratic majorities controlled both chambers. The current Republican majority is even less likely to approve the FRAC Act this year. Similar attempts to repeal the UIC exclusion for injection of fluids through hydraulic fracturing have likewise failed. For example, on January 28, 2015, the Senate rejected a proposed amendment to the Keystone XL Pipeline Act, which sought to repeal the hydraulic fracturing exclusion and expand the UIC program to include the underground storage of natural gas.

SHARED Act The Safe Hydration is an American Right in Energy Development (SHARED) Act of 2015 (H.R. 1515)4 would amend the SDWA to require operators to conduct baseline groundwater testing and compliance monitoring during all stages of operations. Specifically, the legislation would require testing of any underground source of drinking water located within one mile of a well site “for any substance that the [EPA] Administrator determines would indicate damage associated with hydraulic fracturing operations.” The legislation would also require the state or the EPA to publish the test results on the internet.

FRESHER Act The Focused Reduction of Effluence and Stormwater Runoff through Hydrofracking Environmental Regulation (FRESHER) Act of 2015 (H.R. 1460)5 would specifically repeal the exemption for oil and gas activities from the Clean Water Act’s (CWA) stormwater permitting requirements. Under the CWA, pollutants associated with oil and gas operations cannot be discharged to waters of the United States without a National Pollutant Discharge Elimination System or equivalent state-delegated permit. However, the CWA does not currently require oil and gas exploration and production facilities and construction sites to obtain such a permit for uncontaminated stormwater run-off. The FRESHER Act would repeal this exemption, thereby requiring operators to obtain permits for stormwater run-off (contaminated and uncontaminated) for all phases of hydraulic fracturing activities.

BREATHE Act The Bringing Reductions to Energy’s Airborne Toxic Health Effects (BREATHE) Act of 2015 (H.R. 1548)6 would amend Section 112 of the Clean Air Act (CAA), which addresses emissions of hazardous air pollutants (HAPs). In particular, the BREATHE Act would repeal Section 112(n)(4), which specifies that HAP emissions from geographically dispersed oil and gas wells and compressor stations should not be aggregated for the purpose of deciding whether they are “major sources.” A second provision of the BREATHE Act directs the EPA Administrator to add

3 Fracturing Responsibility and Awareness of Chemicals Act, H.R. 2766, 111th Cong. (2009); Fracturing Responsibility and Awareness of Chemicals Act, S. 1215, 111th Cong. (2009). 4 The bill was introduced by Rep. Janice Schakowsky (D-IL). 5 The bill was introduced by Rep. Matthew Cartwright (D-PA). 6 The bill was introduced by Rep. Jared Polis (D-CO).

©2015 Vinson & Elkins LLP www.velaw.com 2 hydrogen sulfide to the list of HAPs under Section 112(b), and to include oil and gas wells as major and area sources of hydrogen sulfide under Section 112(c), thereby authorizing the EPA to set standards to limit hydrogen sulfide emissions from these facilities.

Legislation that Would Ban Hydraulic Fracturing on Federal Lands

On April 22, 2015, House Democrats introduced the “Protect Our Public Lands Act” (H.R. 1902).7 The bill, if enacted, would ultimately prohibit all hydraulic fracturing operations on lands leased by the federal government. The bill would not apply to any operations in effect on the date of the bill’s enactment until the renewal or adjustment of the lease. This approach is at odds with the BLM’s efforts to regulate hydraulic fracturing and is thus even more unlikely to gain traction than the Frack Pack bills.

Legislation that Would Restrict Federal Regulation of Hydraulic Fracturing

In contrast to the Frack Pack, several Senate bills seek to limit federal involvement in hydraulic fracturing. The Fracturing Regulations are Effective in State Hands (FRESH) Act of 2015 (S. 828)8 would give states sole authority to regulate hydraulic fracturing operations within their borders. In addition, the bill specifies that hydraulic fracturing activities on federal lands would be subject to the applicable state law where the operations occur.

The FRESH Act appears to be a response to the BLM’s final rule governing hydraulic fracturing activities on Federal and Indian lands. The final rule, released on March 20, 2015, imposes new well-bore integrity requirements, standards for interim storage of recovered waste fluids, and mandatory notifications and waiting periods for pivotal aspects of the fracturing process. The rule also requires disclosure of the chemicals used in the process, which can be done through the industry-supported FracFocus website.

Similarly, the Protecting States Rights to Promote American Energy Security Act of 2015 (H.R. 1647 and S. 15)9 would amend the Mineral Leasing Act to prohibit the Department of Interior from enforcing any federal regulation, guidance documents, or permit requirements related to hydraulic fracturing in any state “that has regulations, guidance, or permit requirements for that activity.” The legislation also directs the Secretary of the Interior to “recognize and defer” to state regulations on federal land, regardless of whether the state rules are duplicative, more or less restrictive, or impose different requirements. The prohibition on enforcement applies only to the Department of the Interior and therefore would only impact hydraulic fracturing on federal or Indian lands under management by the BLM management.

The House passed similar versions of these bills in November 2013, but the Senate did not vote

7 The bill was introduced by Reps. Mark Pocan (D-WI) and Janice Schakowsky (D-IL). 8 The bill was introduced by Sen. James Inhofe (R-OK). 9 The Senate bill was introduced by Sen. Orrin Hatch (R-UT). The House version was introduced by Rep. Bill Flores (R-TX).

©2015 Vinson & Elkins LLP www.velaw.com 3 on them and the President pledged to veto them. Since there is no indication that the President’s position has changed, these bills have little chance of becoming law before 2017.

Reflections

The development of unconventional oil and gas resources has drawn significant attention from the 114thCongress. Legislation intended to increase federal oversight of hydraulic fracturing has been proposed, largely in response to concerns about potential environmental impacts from well development and stimulation, wastewater management, and air quality impacts. By contrast, other lawmakers have sought to limit federal regulation by displacing existing applicable federal regulations with state-level requirements.

The immediate prospects for the passage of any of these bills are dim. Instead, it seems likely that most regulation of fracking will continue to be left to the states, and any new federal regulation of hydraulic fracturing will take place through various administrative agency actions. However, as long as state regulation remains uneven, and hydraulic fracturing operations continue to enjoy certain exemptions from federal regulation, congressional pressure to act will remain.

For further information, please contact Vinson & Elkins lawyers Larry Nettles, Eric Groten, Jay Rothrock, Corinne Snow, or Jordan Rodriguez.

This paper is intended for educational and informational purposes only and does not constitute legal advice or services. If legal advice is required, the services of a competent professional should be sought. These materials represent the views of and summaries of the authors, and do not necessarily reflect the opinions or views of Vinson & Elkins LLP or of any of its other attorneys or clients. It is not guaranteed to be correct, complete, or current, and it is not intended to imply or establish standards of care applicable to any attorney in any particular circumstance.

©2015 Vinson & Elkins LLP www.velaw.com 4 Kristin L. Watt Partner | Columbus Office Columbus 614.464.8398 | Fax 614.719.5081 Email [email protected]

Kristin is a partner in the Vorys Columbus office and chair of the environmental group. Her practice focuses on environmental compliance and counseling, enforcement defense, environmental audits and permitting issues. She also assists with due diligence in business and commercial real estate transactions and the contracting provisions related to each. Kristin has worked extensively in the areas of solid and hazardous wastes, petroleum underground storage Practice Areas tanks, NPDES permits, wetlands, environmental Energy and Utilities investigation/remediation and green labeling. Environmental Litigation She practices before both administrative bodies and the courts.

Industries Career highlights include: Commercial and Residential Real Arguing successfully before the 10th District Court of Appeals Estate Energy and Utilities Regularly appearing before the Petroleum Underground Storage Manufacturing Tank Release Compensation Board where she has been successful Nanotechnology in arguing issues relating to insurance coverage Oil and Gas Settling a $4 million dollar enforcement case for a large service Education station client The Ohio State University Michael E. Moritz College of Law, J.D., Acting as “special counsel” for a collegiate university client 1989, with Honors related to negotiations with the Ohio EPA The Ohio State University, B.S.B.A., 1986, cum laude Kristin is a member of the Ohio State Bar Association, the Columbus Bar Association and The Ohio State University Moritz College of Law National Council.

Kristin has spoken on many topics, including multimedia audits, environmental audit privileges, environmental issues related to real estate transactions, storm water regulations, underground storage tanks and environmental issues related to Ohio shale fracing.

Kristin received her J.D. with honors from The Ohio State University Michael E. Moritz College of Law and her B.S.B.A. cum laude from

© 2015 Vorys, Sater, Seymour and Pease LLP www.vorys.com Kristin L. Watt (Continued)

The Ohio State University.

Insights

Contributor - Energy & Environmental Law Blog

"“E-Check” Tests Vehicle Emissions in Ohio," September 1, 2011

"Paper or Plastic? Retailers May Be Losing Choice," Environmental Law360, May 2009

"Client Alert: EPA Announces Carbon Nanotubes to be Treated as New Chemical Under TSCA," December 16, 2008

"Client Alert: Nanotechnology Excluded from Insurance by Continental Western Insurance Group," December 16, 2008

"Client Alert: Paper or Plastic?," October 22, 2008

"Environmental Homework Will Pay Off When Taking On Infill Projects," Business First, July 1, 2007

Professional and Community Activities The Ohio State University Alumni Association, Board of Directors, 2014-present The Ohio State University Moritz College of Law National Council, 2000-present Radio Color Commentator for The Ohio State University Women's Basketball Team since 1987 Alpha Phi Rho Corporation, Housing Board (at The Ohio State University), 2006-present Ohio State Bar Association, Environmental Law Committee, Chair, 2010-2013; Vice-Chair, 2008-2010; Secretary, 2007-2009 Ohio State Bar Association, Environmental Law Committee, Annual Seminar, Co-Chair, 2006 Opera Columbus, Trustee, 2004-2010 The Ohio State University Varsity O Women’s Alumnae Society, President, 1992-1994; Board Member, 1992-2002

© 2015 Vorys, Sater, Seymour and Pease LLP www.vorys.com Kristin L. Watt (Continued)

Columbus Bar Association, Environmental Law Committee, Chair, 2000-2001 The Ohio State University Athletic Council, Alumni Representative, 1995-1999 The Ohio State University Alumni Advisory Council, 1997-1999

Honors and Awards The Best Lawyers in America, Environmental Law, 2008-2015 The Best Lawyers in America, Litigation - Environmental, 2013-2015 The Best Lawyers in America, Columbus Environmental Law Lawyer of the Year, 2013 Ohio Super Lawyers, Environmental, 2004-2007, 2009, 2012-2015 Ohio Super Lawyers, Top 25 Women Columbus Area Super Lawyers, 2015 Chambers and Partners, Leading Lawyer in Natural Resources and Environment, 2007-2015 Columbus CEO, Top Lawyers in Columbus, 2010-2015 Fellow of the American Bar Foundation since 2013 Martindale-Hubbell AV Peer Review Rated Fellow of the Columbus Bar Foundation since 1998 Columbus Business First, Forty under 40, 1994

Events The OOGA Winter Expo and Technical Conference Ohio Energy: Emerging Issues in Law, Finance and Regulation Seminar Northern Appalachian Landman’s Association Seminar 28th Annual Ohio Environment, Energy and Resources Law Seminar OSBA's 27th Annual Ohio Environment, Energy and Resources Law Seminar Ohio Oil and Gas Association Winter Meeting OOGA 2011 Conference Series Ohio Shale Production: What You Need to Know CityScape Columbus: A View Towards Development & Growth Opportunities CityScape Cleveland: A View Towards Development & Growth Opportunities

© 2015 Vorys, Sater, Seymour and Pease LLP www.vorys.com Kristin L. Watt (Continued)

OSBA's 26th Annual Ohio Environment, Energy and Resources Law Seminar OSBA's 25th Annual Ohio Environment, Energy and Resources Law Seminar Ohio Environmental Law Seminar: Solid and Hazardous Waste Law Update

Bar and Court Admissions Ohio U.S. Court of Appeals for the Sixth Circuit U.S. District Court for the Northern District of Ohio U.S. District Court for the Southern District of Ohio

© 2015 Vorys, Sater, Seymour and Pease LLP www.vorys.com The Endangered Species Act of 1973 (“ESA”) – The Basics of What You Should Know Today and Why.

EMLF: 6th Law of Shale Plays, September 11, 2015

Kristin L. Watt Vorys, Sater, Seymour and Pease LLP Columbus, Ohio [email protected] 614-464-8398 Basic Background - What is the ESA?

It is a federal program (16 USC §1531 et seq.) that seeks to conserve threatened and endangered plants and animals and their respective critical habitats. Some keys terms:

x Threatened = Any species likely to become endangered within the foreseeable future throughout all or a significant portion of its range. x Endangered = Any species which is in danger of extinction throughout all or a significant portion of its range. x Critical Habitat = A specific geographic area occupied by the species with features essential for the conservation of the species. Critical habitat may also include areas that are not occupied by the species but essential for the conservation of the species. x Take = Means to harass, harm, pursue, hunt, shoot, wound, kill trap, capture, or collect, or to attempt to engage in any such conduct. “Harm” is further defined to include significant habitat modification or degradation which “actually kills or injures fish or wildlife by significantly impairing essential behavioral patterns, including, breeding, spawning, rearing, migrating, feeding or sheltering.” x Jeopardy = When an action is reasonably expected, directly or indirectly, to diminish a specie’s number, reproduction or distribution, or result in the destruction of adverse modification of critical habitat, so that the likelihood of survival and recovery in the wild is appreciably reduced.

See 50 CFR §17.3, Definitions.

When Does the ESA Come Into Play?

The ESA is applicable at all times and prohibits the taking of listed species; however, the act is usually only brought into play when federal agency action is required – for example, when a federal permit is issued. Specifically, §7 of the ESA requires federal agencies to consult with the U.S. Fish and Wildlife Service(“USFWS”)to“insurethatanyactionauthorized...isnotlikelytojeopardizethecontinued existence of any endangered species or threatened species or result in the destruction or adverse modification of [critical] habitat of such species. . . .” Thus, whenever a federal agency is taking an action (e.g. the U.S. Army Corps of Engineers (“USACE”) issuing a CWA §404 permit1), that federal agency (“action agency”) must determine if its action “MAY affect” a listed (endangered or threatened) species; if so, that federal agency must consult with the USFWS.2

Consultations are either informal or formal. Most consultations use the informal route – the formal consultation route is not common. In an informal consultation, the goal is to obtain agreement between the action agency and the USFWS that the action is “not likely to adversely affect” the species. For example, for those of you who have dealt with tree clearing activities associated with a CWA §404 permit, you have likely had to deal with the Indiana Bat (listed as endangered) or Northern Long Eared Bats (listed as threatened). “Winter clearing”3 of trees would be considered an option that would allow a “not likely to adversely affect” determination. (If this decision can’t be agreed to in an informal consultation, then formal consultation is required.)

During a formal consultation between the USFWS and an action agency, the USFWS will determine whether the proposed activity will jeopardize the species. If the USFWS determines that the proposed action would jeopardize the species or result in the destruction or adverse modification of critical habitat, the Service will provide alternative reasonable and prudent actions to avoid jeopardy. (No action can be taken that would jeopardize a listed species.)

Of note, the USFWS consults with the action agency – yet it is the action agency that ultimately decides how to proceed. Thus, using a CWA §404 permit as an example, it is the USACE that ultimately decides whether to issue a §404 permit and any ESA conditions contained therein.

Today, What Are the Most Important Practical Things to Know About the ESA?

There are plenty of guidance documents available on the Web that can provide all kinds of nitty-gritty detail about the ESA. You can start at http://www2.epa.gov/laws-regulations/summary-endangered- species-act and http://www.fws.gov/endangered/laws-policies/. However, there are a handful of practical things that you should know.

States can have their own regulatory requirements. Make sure you are aware of each applicable state law requirement related to endangered or threatened species. For instance, states may have their own list for endangered or listed species that is more expansive than the federal list. Moreover, some states may have different (more stringent than) requirements that are applicable to federally listed species. For example, with respect to the Indiana Bat and Northern

1 Because one of the more common reasons the ESA is implemented relates to CWA § 404 permitting and the ESA provisions related to protections for the Indiana Bat and the Northern Long Eared Bat, these will be referred to herein as examples. 2 Consultation would be required with the National Marine Fisheries Service for any action that may adversely affect essential fish habitat. 3 Winter clearing is when habitat trees can be cleared during the winter months (October 1, through March 31), when I Bats and NLEBs would not be using the trees. Thus, winter clearing of trees would “not likely adversely affect” these listed bat species.

-2- Long Eared Bat, there could be a state tree-clearing season that is different from that federally imposed.4 The moral of this story is to become familiar with the nuances of each state law.

Timing, Timing, Timing. Depending on the species, there can be critical time periods when certain activities can or cannot take place without violating the law. Let’s again look at an Indiana Bat and Northern Long Eared Bat example in relation to the issuance of a CWA §404 permit to dredge or fill a water of the United States. If an individual CWA §404 permit is necessary, it can take 12 to 18 (sometimes/many times longer) to obtain. If a Nationwide Permit is an option, that can still take 60 to 120 (or more) days to obtain. Many §404 permitting projects require tree removal. Generally speaking, certain trees, including those that serve as maternity roosts, cannot be removed during the construction season without a mist net survey (to prove presence or absence of the bat). Otherwise, trees can only be removed during the winter clearing season (October 1 through March 31).

Prior to submitting any §404 permit application, if any listed species or designated critical habitat might be affected or is in the vicinity of the project, work should not begin on the project until notified by the USACE that the requirements of the ESA have been satisfied and the project is authorized. Thus, if you have not done your homework prior to submitting your §404 permit application, your permit will not be issued until the required ESA work is performed, which can further delay projects.

Moreover, this means that you need to plan well in advance the timing of your § 404 permit application submission so that the timing of the permit issuance coincides with when trees can be removed. It is not uncommon for a project to be delayed many months or a year, even with a permit in hand, until the trees are allowed to be cleared.

Now, add to this the fact that some state rules may also prohibit all tree clearing activities, even with USFWS/USACE approval, until a well pad construction permit is obtained. Well pad construction permits can take 3 to 7 months to be issued. This layering of permits must be considered when realistically timing a project.

Bottom line, know that bat conservation requirements for certain species (i.e. the Northern Long Eared Bat) are still a moving target, state laws and guidelines are still a moving target, and USFWS/USACE staff capacity issues (during boom and bust periods) all affect the timing of how long it may take to obtain the necessary approvals under the ESA. And depending on when those approvals come, you may still have to wait to cut trees necessary to start a project. This all illustrates the need to plan at least a year or more in advance – which can sometimes be difficult when budgets are being cut industry-wide.

Will the New USEPA Rule that Arguably Expands the Definition of Water of the United States Affect Project Timing? On June 29, 2015, the USEPA and USACE published its new, arguably

4 This is true in Ohio where the Indian Bat mist netting season is 15 days shorter (June 1 – August 15) than the federal mist netting season (May 15- August 15). There used to be a 30 day difference.

-3- expanded, definition of Waters of the United States. (80 FR 37054). Many wetland consultants have indicated that the new rule will change how those consultants determine what is or is not a water of the United States. Many consultants are saying they will be more conservative and likely designate more areas as being water subject to CWA jurisdiction. Do you have projects that were previously determined not to be subject to CWA jurisdiction? That is, were project areas previously determined not to have wetland impacts now potentially within CWA jurisdiction? If so, the project area might now be subject to § 404 permitting requirements – and ESA oversight – that were not previously expected and could derail project timing.

Hire a Knowledgeable Consultant Who Knows the Local Laws/Requirements. I can’t over emphasize this point enough. The ESA expectations are somewhat in flux for certain listed species. Each USFWS field office seems to do things their own way. Different regions within a listed species’ range can handle each species differently – including endangered bat tree- clearing requirements. An additional layer of state specific requirements can also muddy the water. As exploration and production companies move into new shale play areas, or into new areas within a single shale play, I would caution against retaining the ESA consultant you worked with in another state or region and assume a smooth transition to a new state. Not having local knowledge can delay projects. For instance, in Ohio, there is no codified law or published regulation that sets the summer mist netting season (Ohio’s season is June 1 through August 15 – compared to the USFWS mist netting season of May 15 through August 15). This is not something easily looked up or researched in Ohio. For a while, the only place this shortened Ohio season was made known was in the small print of Ohio’s take permits.

Is there a new, approved USFWS technology that maybe should not yet be implemented? Remember when the USFWS first allowed acoustic surveys for Indiana Bats – even though it was determined there could be a high rate of false positives for Indiana Bat presence when using acoustic surveys? Once the acoustic survey showed a false positive, you had to live with that result, even if a later performed mist net survey found no Indiana bat present. Using acoustic surveys before it was more of a proven technology has delayed many projects. Use consultants that can explain the risks/rewards of new applicable technologies.

Environmental Groups’ Sue and Settle Tactics are Bringing More and More Species into the Fold. The US Chamber’s website provides a good explanation of what is “sue and settle”? "’Sue and Settle’ refers to when a federal agency agrees to a settlement agreement, in a lawsuit from special interest groups, to create priorities and rules outside of the normal rulemaking process. The agency intentionally relinquishes statutory discretion by committing to timelines and priorities that often realign agency duties. These settlement agreements are negotiated behind closed doors with no participation from the public or affected parties.” https://www.uschamber.com/report/sue-and-settle-regulating-behind-closed-doors

Due to several sue and settle “actions,” literally hundreds of new species are being considered for ESA listing by the USFWS. This means there will likely be more regulation and development limitations imposed in the future. Be aware of this in your planning. The ESA sue and settle

-4- cases have caused Congress to start discussions to rewrite or amend the ESA. Only time will tell if there is the will and might to take on the ESA. Support congressional efforts when prudent.

The ESA as Drafted Does Not Implement a Cost/Benefit Analysis. No matter how hard it is to get your head around this, it’s a fact. Don’t try arguing this point. The USFWS has no authority to consider any costs or benefits of its actions or decisions.

-5- 8/27/2015 22680798 R. TIMOTHY WESTON

R. Timothy Weston is a partner in the Harrisburg, Pennsylvania office of K&L Gates LLP, and practice group coordinator of K&L Gates’ global Energy Practice Group. With 43 years of experience in environmental and natural resources counseling and litigation, energy development, administrative and legislative issues, his practice includes representation of diverse interests in project development, natural resource management and regulatory matters. As part of K&L Gates’ Appalachian Basin oil and gas team, Mr. Weston has been active practitioner in the area of environmental and natural resource issues associated with development of the Marcellus and Utica Shale gas plays and associated downstream projects (including major power plant and petrochemical facility developments) across the basin. Mr. Weston is a 1972 cum laude graduate of Harvard Law School, and earned his B.A. in mathematics with high honors from the University of California at Santa Barbara in 1969. Mr. Weston served for eight years as an Assistant Attorney General in the Pennsylvania Department of Environmental Resources, and from 1979 to 1987, as the Department’s Associate Deputy Secretary for Resources Management. He has written extensive on the subjects of water resources, environmental permitting, environmental issues in transactions, noise control and other subjects relevant to shale gas and major project development. He currently serves as Chair of the Pennsylvania Statewide Water Resources Committee, responsible for guiding development of the Commonwealth’s State Water Plan, and a member of the Citizens Advisory Council to the Pennsylvania Department of Environmental Protection. NOISE REGULATION OF THE SHALE OIL & GAS EXTRACTION AND PRODUCTION INDUSTRY

6th Law of Shale Plays Conference Institute for Energy Law, Center for American & International Law Energy & Mineral Law Foundation Pittsburgh, PA - September 10-11, 2015

R. Timothy Weston Tad Macfarlan K&L Gates LLP 17 North Second Street, 18th Floor Harrisburg, PA 17101 (717) 231-4500 [email protected] [email protected] Table of Contents

A. Introduction...... 1 B. What is “Noise”? – Definition & Measurement...... 1 C. The Oil & Gas Industry’s Noise Issues ...... 4 D. The Side-Tracked Federal Regulation of Noise ...... 5 E. State, Provincial and Local Regulation of Noise from Oil and gas operations ...... 5 1. Common Law Doctrines Applicable to Noise...... 6 2. Pennsylvania ...... 10 3. Ohio...... 13 4. West Virginia...... 13 5. Texas...... 15 6. Colorado...... 17 7. Alberta, Canada...... 19

F. Conclusion ...... 22

-i- A. INTRODUCTION

NOISE, n. A stench in the ear. Undomesticated music. The chief product and authenticating sign of civilization.1

Ambrose Bierce’s amusing definition conveys an apt observation concerning the challenges facing the shale oil and gas sector in tackling the issue of “noise.” Since the dawn of the industrial revolution, if not long before, one hallmark of civilization has been the generation, propagation, receipt and reaction to “noise”– most commonly defined as “unwanted sound.” Wherever humans come together and engage in activities of life and commerce, sound is generated. At some point along the spectrum of such sound – from the outdoor coffee house conversation to the din of late night patrons leaving the pub, from the barking dog to the construction worker’s hammer, from the drone of lawnmowers on a summer evening to the cacophony of a busy airport – such sound becomes unwanted, annoying, disturbing, distracting, to the point of becoming a “nuisance.” Beyond mere irritation, as documented in the U.S. Environmental Protection Agency’s (“EPA”) seminal “Levels Document,”2 sound levels in the environment may reach the point of becoming a public health and welfare concern. Noise can cause hearing loss; interfere with human activities at home and work; annoy, awaken, anger and frustrate people; disrupt communications and individual thoughts; and become a biological stressor.3 To be sure, the oil and gas industry is not the first, or even the “worst,” contributor to noise within the environment. But with the development of unconventional well drilling technologies, involving longer and more intensive drilling activities, more intensive truck traffic serving well pads, and the spread of gathering, conditioning and compressor facilities across areas heretofore not impacted by oil and gas activities, increased focus has been placed by the public and regulators alike on noise associated with shale plays. This paper seeks to provide a context to, and then survey, some of the developing regulatory approaches to shale play noise management.

B. WHAT IS “NOISE”? – DEFINITION & MEASUREMENT

The sound humans hear is the result of a source inducing vibration in the air or other media, with the vibrations producing alternating bands of dense and sparse particles of air,

1 Ambrose Bierce, in DEVIL'S DICTIONARY (1911). 2 EPA, Office of Noise Abatement & Control, Information on Levels of Environmental Noise Requisite to Protection Public Health and Welfare with an Adequate Margin of Safety, EPA/ONAC 550/9-74-004 (March 1974) (“EPA Levels Document”); see also EPA, Protective Noise Levels, Condensed Version of EPA Levels Document, EPA 550/9-79-100 (1979) (“EPA Condensed Levels Document”). 3 EPA Condensed Levels Document at 1.

-1- spreading outward in much the same way as ripples in water. Sound pressure waves radiate in all directions of the source, and may be scattered, reflected, sometimes concentrated or deflected, over the propagation pathways toward human and animal receptors. These pressure fluctuations are in turn converted into auditory sensations by the human ear, in turn triggering various types and degrees of reaction. Sound is generally described in terms of three variables: (1) amplitude (perceived loudness), (2) frequency (pitch), and (3) time pattern. Sound pressure is the amplitude or measure of difference between atmospheric pressure with and without the presence of a particular sound. The basic measure of sound pressure or amplitude is the decibel (“dB”). The decibel scale is logrithmic, not linear. Thus, a sound of 30 dB involves sound pressure waves 10 times that of 20 dB. Sharply painful sound is 10 million times greater than the source pressure that is merely audible. Multiple sources of sound can lead to higher cumulative sound levels, but two separate sounds are not directly (arithmetically) additive. Thus, a sound of 70 dB added to another source of 70 dB will result in a cumulative sound of 73 dB. The frequency (pitch) of a sound is measured based on the number of waves per second (cycles per second) of the sound. The measurement metric is referred to as Hertz (“Hz”). A frequency of 100 Hz signifies a sound with 100 cycles per second. Most humans can hear frequency from about 16 to 20,000 Hz. As a reference, the hum of an electric current is 60 Hz. Most sounds consist of a complex mixture of frequency. On the other hand, humans are more sensitive to and find more annoying sounds involving “pure” frequency – e.g., an incessant hum. The third variable, time pattern of sound, considers the continuity, duration, fluctuation, impulsiveness, intermittency of sound. Compared to relatively constant and even sounds, impulsive noises (the hammer blow or dropped pipe) are generally more irritating to receiving humans, snatching attention, disrupting thought, interrupting sleep. Considering these three variables, trying to measure and describe environmental noise is not easy. Back in the 1970’s, EPA developed a system of four “sound descriptors” to summarize how people hear sound and determine the impact of noise on public health and welfare. The four descriptors were: (1) A-weighted Sound Level; (2) A-weighted sound Exposure Level; (3) Equivalent Sound Level; and (4) Day-Night Sound Level. As described in the EPA Levels Document, these four descriptors are related but each is more useful for particular types of measurements. Most literature and noise regulatory provisions refer to A-weighted Sound Level, a measurement that attempts to reflect the relative sensitivity of the human ear to sounds of various frequencies, and applies “weights” to the sound levels of different frequencies along the spectrum to come up with one number that describes the overall relative sound level. Meters have been developed that contain the A-weighting network, allowing measurements to be taken and reported in decibels A-scale (“dBA”). Such dBA levels may be alternatively measured and

-2- expressed on an instant peak, maximum level, or steady-state level. Generally, the A-weighted Sound Level has been adopted for most regulatory efforts because it is convenient, accurate for most purposes, and used extensively across the world.4 To set a benchmark for some of the discussion to follow, Figure 1 provides the relative A-weighted decibel values of some typical environmental noises. Figure 1. Comparison of Approximate Sound Pressure Levels

Environmental Sound Levels dBA Sound Levels at a Given Distance (Meters) Threshold of Pain 135 130 125 120 Jet Airplane Takeoff (500 m) 115 Typical Rock Concert 110 105 On Platform by Passing Subway Train 100 95 Jackhammer (15 m) 90 Compressor (8 m) 85 Heavy Truck (15 m) On Sidewalk by Typical Highway 80 Average well construction site (8 m) 75 70 Vacuum Cleaner (3 m) / Tank Truck (152 m) 65 Typewriter (1 m) / Avg. Well Construction Site (152 m) Avg. Urban Area Background/Busy Office 60 Drilling pump (152 m) 55 Large Transformer (15 m) Urban Residence 50 Conversation (1 m) Small Town Residence 45 40

4 EPA’s more tailored Sound Exposure Level, Equivalent Sound Level, and Day-Night Sound Level measures provide alternative methods for describing sound for different purposes. The Sound Exposure Level provides a summation of the energy of the momentary magnitudes of sound associated with an event, such as an airplane, train or truck. The Equivalent Sound Level provides a measure of the average environmental noise levels to which people are exposed, considering both the volume and duration of sound levels over some time period. The Day- Night Sound Level provides a means to characterize sound levels in residential areas throughout the day and night, and adds 10 dB to nighttime sounds (10 pm to 7 am) as a surrogate for the relatively increased irritation of residential recipients to night sounds. It may be noted that similar measures in other jurisdictions apply different weightings to nighttime sounds, ranging from 5–10 dBA. Compare Alberta Energy Regulator Directive 038: Noise Control (Feb. 16, 2007) at 8 (10 dBA adjustment) with Colorado Oil and Gas Conservation Commission Rule 802.b. (5 dBA adjustment).

-3- Environmental Sound Levels dBA Sound Levels at a Given Distance (Meters) 35 Soft Whisper (2 m) Rural Area at Night 30 25 Rustling of Leaves (20 m) Isolated Broadcast Studio 20 15 Audiometric (hearing testing) Booth 10 5 Threshold of Hearing 0

C. THE OIL & GAS INDUSTRY’S NOISE ISSUES

Noise from shale play development and operations is derived from multiple sources: truck traffic, drilling and completion operations, pumps, compressors, generators, relief valves, etc. The challenge is that most shale play activities occur in relatively rural settings, where ambient noise levels are low and the nature and amplitude of noise levels generated in exploration and production (“E&P”) activities will be most noticeable to neighbors, particularly residences.

Various measurements and estimates have been made as to the sound levels produced by typical E&P operations. Some reported values (some of which are dated and may not be reliable) are reflected in the following table.

Source La Plata County, CO Study BLM Draft EIS5 Compressor 50 dBA (375 feet from property 89 dBA (50 feet from source)6 boundary) Pumping units 50 dBA (325 feet from well pad) 82 dBA (50 feet from source) Fuel and water trucks 68 dBA (500 feet from source) Crane for hoisting rigs 68 dBA (500 feet from source) Pump used during drilling 62 dBA (500 feet from source) Average well construction 65 dBA (500 feet from source) 83 dBA (50 feet from source) site Produced water injection 71 dBA (50 feet from source)

5 Bureau of Land Management, Draft RMPA/EIS for Federal Fluid Minerals Leasing and Development in Sierra and Otero Counties (Oct. 2000) 6 As a note, sound attenuates in accordance with the inverse square law. See http://www.engineeringtoolbox.com/outdoor-propagation-sound-d_64.html. Thus, estimates of sound attenuation at distances greater than 50 feet can be approximated by applying a reduction of 6 dBA for each doubling of distance. Thus, 89 dBA at 50 feet would equate to 83 dBA at 100 feet, 77 dBA at 200 feet, and 71 dBA at 400 feet.

-4- D. THE SIDE-TRACKED FEDERAL REGULATION OF NOISE

The Federal Government’s foray into the field of noise regulation started out in earnest and eventually fell apart. The Noise Control Act of 19727 and the Quiet Communities Act of 19788 sought to establish programs requiring the federal government to set and enforce uniform noise control standards for aircraft and airports, interstate motor carriers and railroads, workplace activities, medium and heavy-duty trucks, motorcycles and mopeds, portable air compressors, and federally assisted housing projects located in noise exposed areas. The Noise Control Act also required federal agencies to comply with all federal, state, and local noise control laws and regulations. EPA’s one time Office of Noise Abatement and Control (“ONAC”) set out to implement these mandates, making substantial strides in the field of aircraft and airport noise control, noise labeling of various equipment, and certain other measures. Under this authority, EPA set noise control standards for certain construction equipment air compressors at 76 dBA.9 The standards for trucks over 10,000 pounds only apply to those manufactured after 1978 and range from 80 to 83 dBA depending on the model year.10 However, in 1981, the Reagan Administration concluded at the executive level that noise issues were best handled at the state or local government level. As a result, EPA shifted noise control policy to transfer the primary responsibility for regulating noise to state and local governments. ONAC's funding was phased out in 1992. The Noise Control Act of 1972 and the Quiet Communities Act of 1978, however, have never been rescinded by Congress and remain in effect today, although essentially unfunded.

E. STATE, PROVINCIAL AND LOCAL REGULATION OF NOISE FROM OIL AND GAS OPERATIONS

In the absence of a comprehensive federal regulatory regime, state and local governments have assumed primary responsibility for regulating noise in the United States. Noise control is most often addressed via a combination of common law nuisance law and/or local codes and ordinances, which vary significantly in form from locality to locality. Historically, common law doctrines (primarily based in private and public nuisance) provided the vehicle by which neighbors and communities sought redress against noises deemed to be

7 P.L. 92-574, 86 Stat. 1234, Oct. 27, 1972, as amended, 42 U.S.C. §§ 4901–4918. 8 P.L. 95-609, 92 Stat. 3079, Nov. 8, 1978 (amending the Noise Control Act of 1972 and other federal statutes). 9 40 C.F.R. Part 204. 10 Id. Part 205, Subpart B.

-5- excessive or damaging. Common law approaches have been supplemented, and in some cases supplanted by, statutes, codes and ordinances addressing noise issues in various ways. Municipal zoning codes indirectly control noise by establishing setbacks and relegating heavier industrial and manufacturing uses to specific zones, away from more noise-sensitive residential areas. Many local governments also enact ordinances that directly regulate noise through restrictions that are either qualitative (i.e., prohibitions on “unreasonable” or “excessive” noise) or quantitative (i.e, prohibitions on noise above defined numeric thresholds, often expressed in dBA, at particular places and times) in nature. These restrictions can apply broadly to all persons and entities within a municipality or, alternatively, they can target specific types of noise-intensive activities. In municipalities where oil and gas operations are common, local ordinances sometimes address noise from these facilities in specifically tailored oil and gas provisions. In some states, oil and gas regulators have promulgated, or are considering whether to promulgate, noise control requirements that apply uniformly to all oil and gas operations within the state. These state-level noise regulations may or may not supersede local noise ordinances under evolving and varied preemption doctrines, which are developed by state courts as a matter of state law.11 In the sections that follow, we provide a brief overview of the common law nuisance approach to noise issues, and then describe some of the notable oil and gas noise control regimes and initiatives from a sampling of important oil and gas producing states (and one Canadian province).

1. Common Law Doctrines Applicable to Noise

Long before the advent of regulatory approaches to noise, the common law doctrines of nuisance (and in some cases trespass) have been applied by the courts to provide redress for noise complaints.

The American Law Institute’s Restatement (Second) of Torts, which attempts to summarize the consensus common law position of the fifty states, defines a private nuisance as “a nontrespassory invasion of another’s interest in the private use and enjoyment of land.”12 Under the Restatement, an otherwise lawful invasion must be (1) either “intentional” and “unreasonable”, or “unintentional and otherwise actionable” under rules relating to negligence, reckless conduct or abnormally dangerous activities,13 and (2) cause “significant” harm “of a

11 See, e.g., State ex rel. Morrison v. Beck Energy Corp., Slip Op. No. 2015-Ohio-485, 2015 WL 687475 (Feb. 17, 2015); Huntley & Huntley, Inc. v. Borough Council of the Borough of Oakmont, 964 A.2d 855 (Pa. 2009); Range Resources–Appalachia, LLC v. Salem Twp., 964 A.2d 869 (Pa. 2009). 12 Restatement (Second) of Torts § 821D (1979). 13 Id. § 822.

-6- kind that would be suffered by a normal person in the community or by property in normal condition and used for a normal purpose”,14 in order to be actionable as a private nuisance. The “unreasonableness” of an invasion is determined by considering whether “the gravity of the harm outweighs the utility of the actor’s conduct,” taking into account a variety of factors, including the extent and character of the harm, the suitability of the parties’ respective uses of their property to the character of the locality, and the impracticability of preventing or avoiding the invasion.15 Under this multi-factor balancing test, courts exercise substantial equitable discretion in determining whether, under the fact-specific circumstances of each case, it would be justified to order the elimination or curtailment of an alleged noise nuisance.

As one example from a key shale play jurisdiction, the Pennsylvania Supreme Court has applied standards similar to the Restatement’s to determine whether an otherwise lawful pursuit qualifies as a nuisance on the basis of the noise that it generates. Perhaps the fullest recitation of the law on this point was provided in the following passage from Molony v. Pounds:

Cases of this character are governed by well settled legal principles. No one is entitled to absolute quiet in the enjoyment of his property. All that may be insisted upon is a degree of quietness consistent with the standard of comfort in the locality in which one dwells[.] Persons living in a community or neighborhood must subject their personal comfort to the commercial necessities of carrying on trade and business, and where the individual is affected only in his taste, his personal comfort, or pleasures, or preferences, these must be surrendered to the comfort and preferences of the many[.] The use of property for other than residential purposes may be, and at times is, an annoyance to dwellers in the vicinity, but the mere fact of annoyance does not establish the existence of a nuisance and is not of itself a sufficient basis for an injunction against the particular use from which the alleged annoyance arises[.] Where the annoyance arises from the conduct of a business which is not a nuisance per se, a strong effort will be made to conserve the rights of all parties. An important question is, can the noise by any reasonable means be moderated so as to accord with the degree of quietness the plaintiff has a right to enjoy, and if it can, by what means[.] In such cases, equity will not ordinarily interfere unless the proof shows that the injury arises either from an improper conduct of the business or from one that could be remedied[.]16

In Molony, applying these principles, the Court found that the operation of a restaurant in Conshohocken, Pennsylvania between the hours of 1 a.m. and 6 a.m., under appropriate conditions, did not constitute a nuisance that warranted abatement by court order.17 Amongst

14 Id. § 821F. 15 Id. §§ 826–831. 16 64 A.2d 802, 803–04 (Pa. 1949) (emphasis added) (citations omitted). 17 Id. at 804.

-7- other factors, the court noted the nature of the area, the relative frequency and duration of the noise, and the fact that the sounds did not result from “an improper conduct of the business or from one that could be remedied.”18

Another oft-quoted statement of the law in Pennsylvania originated in Ebur v. Alloy Metal Wire Co., which provided:

The courts have found it difficult to lay down any precise and inflexible rule by the application of which it can be determined that a plaintiff in a given case is entitled to relief by injunction against smoke, fumes, and noises emitted in the vicinity of his residence. It has been said that a ‘fair test as to whether a business lawful in itself, or a particular use of property, constitutes a nuisance, is the reasonableness or unreasonableness of conducting the business or making the use of the property complained of in the particular locality and in the manner and under the circumstances of the case.’ 46 C. J. 655. It has also been said: ‘Whether the use is reasonable generally depends upon many and varied facts. No hard and fast rule controls the subject. A use that would be reasonable under one set of facts might be unreasonable under another. What is reasonable is sometimes a question of law, and at other times, a question of fact. No one particular fact is conclusive, but the inference is to be drawn from all the facts proved whether the controlling fact exists that the use is unreasonable.’ 46 C. J. 656. No word is used more frequently in discussing cases of this kind than the word ‘reasonable,’ and no word is less susceptible of exact definition. What is reasonable under one set of circumstances is unreasonable under another….19

In Ebur, the Court modified what it determined to be an excessively restrictive lower court order with respect to the defendant’s wire and metal products factory, tailoring the injunction to preclude only noise and vibrations “which are unnecessary and unreasonable under the circumstances, and which can be eliminated by the efficient operation of its plant and by the installation of the most effective reasonably available devices for the reduction of … noises, and vibrations in its plant ….”20

More recently, the Pennsylvania Commonwealth Court efficiently summarized the state of the law as follows: “To constitute a nuisance based upon noise, the question is whether the noise is unreasonable and unnecessary considering all of the circumstances involved.”21

Case law from other shale play states indicate that similar principles are applied in judging common law nuisance claims.

18 Id. at 804–05. 19 155 A. 280, 282 (Pa. 1931) (emphasis added). 20 Id. at 285 (emphasis added). 21 Gray v. Barnhart, 601 A.2d 924, 927 n. 4 (Pa. Cmwlth. 1992) (emphasis added).

-8- For example, Ohio courts have noted that determination of a private nuisance is “a matter of degree” that turns on whether “the use to which the property is put is reasonably under the circumstances” and “whether there is an appreciable, substantial, tangible injury resulting in actual, material, physical discomfort.”22 In that regard, the “what amount of annoyance or inconvenience will constitute a legal injury, resulting in actual damages” cannot be “precisely defined” and is “dependent on varying circumstances” to be determined by the trier of fact.23

West Virginia’s Supreme Court has likewise found that determination of a nuisance “ius incapable of an exact and exhaustive definition”, but involves “a substantial and unreasonable interference with the private use and enjoyment of another’s land.”24 In the specific context of noise, West Virginia’s courts has ruled that “noise alone may create a nuisance, depending on time, locality and degree”, and where “an unusual and recurring noise is introduced in a residential district, and the noise prevents sleep or otherwise disturbs materially the rest and comfort of the residents, the noise may be inhibited by a court of equity.”25

Similarly, Texas courts have noted that the amount of annoyance and inconvenience that must be produced to constitute a nuisance depends on varying facts,26 including the lawfulness of the use, the result it produces, considered in the context of the locality and surrounding uses.27

In sum, in order to determine whether a particular activity constitutes a noise nuisance, the question is whether the noise is unreasonable considering all of the circumstances. That determination requires a consideration and weighing of the circumstances, including, but not limited to, (a) the level and frequency of the noise, (b) where it occurs, (c) when it occurs, (d) the reasonable expectations of those impacted by the noise, and (e) the ability of the persons making the noise to reasonably control it.

The hallmark of the common law approach to noise involves adjudication in the judicial system of individual, often fact-intensive disputes. Such cases are expensive, time-consuming (frequently extending well beyond the timeframe of a short duration activity), and often require presentation of competing expert testimony – ultimately leading to a jury or judge determining the issues of reasonableness and necessity, and the feasibility of control.

22 Antonik v. Chamberlain, 78 N.E.2d 752, 759 (Ohio Ct. App. 1947). 23 Columbia Gas Light and Coke Co. v. Freeland, 12 Ohio St. 392, 399 (1961). 24 Hendricks v. Stalnaker, 380 S.E.2d 198, 199 (W.Va. 1989), quoted in Bansbach v. Harbin, 728 S.E.2d 533, 537 (W.Va. 2012). 25 Burch v. Nedpower Mount Storm, LLC, 647 S.E.2d 879, 883 (W.Va. 2007) (internal quotes and citations omitted). 26 McAfee MX v. Foster, 2008 Tex. App. LEXIS 968 (Tex. App. 2008). 27 Gose v. Coryell, 126 S.W. 1164, 1168 (Tex. Civ. App. 1910).

-9- 2. Pennsylvania

Pennsylvania, at the center of the shale gas revolution in the Marcellus Shale region, has taken several steps forward and back with respect to regulation of noise from oil and gas facilities. In February 2012, Pennsylvania enacted Act 13,28 a comprehensive revision to the Commonwealth’s Oil and Gas Act.29 In an attempt to provide regulatory uniformity to the oil and gas industry, Act 13 included several provisions that broadened the scope of state preemption of municipal authority over oil and gas facilities.30 Several of these preemption provisions limited the authority of local governments to regulate noise from oil and gas facilities. Specifically, Act 13 required municipalities to authorize natural gas compressor stations as a permitted use in agricultural and industrial zoning districts, and as a conditional use in all other zoning districts, if the compressor station could achieve (among other standards) a noise level of 60 dBA at the nearest property line.31 Similarly, the Act required municipalities to authorize natural gas processing facilities as a permitted use in industrial districts, and as a conditional use in agricultural districts, if (among other standards) the noise level of the facility would not exceed 60 dBA at the nearest property line.32 Act 13 also prohibited municipalities from imposing noise control requirements on permanent oil and gas operations that were more stringent than requirements imposed on other industrial uses in the same zoning district – effectively preventing municipalities from singling out the oil and gas industry for special, enhanced regulatory scrutiny.33 These statewide uniformity provisions were short-lived. In December 2013, in Robinson Township v. Commonwealth,34 the Pennsylvania Supreme Court struck down Act 13’s new preemption provisions, including the noise control sections. A plurality of the Pennsylvania Supreme Court found that the preemption provisions violated the Environmental Rights Amendment of the Pennsylvania Constitution.35 The plurality’s opinion36 found that the state

28 Act of February 14, 2012, P.L. 87, No. 13. 29 58 Pa.C.S. §§ 3201–3309. 30 Id. §§ 3301–3309. 31 Id. § 3304(b)(7). 32 Id. § 3304(b)(8). 33 Id. § 3304(b)(3). 34 83 A.3d 901 (Pa. 2013). 35 Pa. Const. Art I, § 27. 36 It is critical to note that the much-discussed lead opinion in Robinson Township authored by then Chief Justice Castille was issued by only a three justice plurality, and hence as a legal matter the opinion does not create binding precedent. See, e.g., Commonwealth v. Thompson, 985 A.2d 928, 937 (Pa. 2009) (a plurality decision “is not binding authority”).

-10- legislature had violated its constitutional duty to protect certain environmental values and to conserve and maintain the Commonwealth’s public natural resources by preventing municipalities from effectively addressing the environmental consequences of oil and gas development.37 The court’s decision meant that municipalities would once again have greater leeway in regulating noise and other environmental effects of oil and gas development within their borders. Following the Supreme Court’s decision (and after a change in administration at the Governor’s office in 2015), the Pennsylvania Department of Environmental Protection (“PaDEP”) proposed new statewide noise standards for oil and gas facilities. The proposed noise controls were unveiled in an “advanced notice of final rulemaking” in April 2015,38 as part of a larger package of revisions to Pennsylvania’s environmental rules for oil and gas facilities that have been in development since shortly after the enactment of Act 13 in 2012. PaDEP’s April 2015 proposal would have required operators of unconventional well sites to prepare and implement a site-specific noise mitigation plan to minimize noise during well drilling, stimulation, and servicing activities.39 Under the April proposal, such plans would include: (1) an assessment of background noise in the area of the well site; (2) an assessment of known and potential noise from drilling stimulation and servicing activities, taking into consideration the interests of nearby residents; and (3) a description of the operator’s plans to mitigate noise, which would have to be based on a “best practices approach” to noise management.40 Operators would then have been required to conduct regular inspections to evaluate the effectiveness of their noise mitigation plans and take corrective actions if necessary.41 The April 2015 proposed rule would also have authorized PaDEP to order the suspension of operations if it determines during drilling, stimulation or servicing activities that a plan is inadequate to minimize noise.42 PaDEP’s proposal was criticized by the regulated community for combining vague requirements with a stringent enforcement mechanism. The April 2015 proposal left wide open questions: what are “best practices” and what is a “best practices approach”? To take an example, if your neighbor mows his lawn on Sunday morning, is the best practice to buy an electric mower, or switch to another day or hour? With respect to noise from roads, is the best practice to instruct truck drivers to avoid using engine break shifting, or does it require erection of sound barriers all along the road (as PennDOT does in some urban areas)? For well drilling

37 83 A.3d at 978–82. 38 See 45 Pa. Bulletin 1615 (Apr. 4, 2015). 39 See 25 Pa. Code § 78a.41(a) (DRAFT Mar. 9, 2015). 40 Id. § 78a.41(b). 41 Id. § 78a.41(d) & (c) 42 Id. § 78a.41(c).

-11- rigs, does “best practices” mandate mufflers on engines, or erection of sound barriers all around the rig? PaDEP leaders had indicated that they borrowed some of the proposed concepts from the Alberta Directive 038, discussed in Section E.7 below. But the Alberta Directive’s best practices program is encouraged, not mandated; and PaDEP’s April 2015 proposal dropped all of the definitions and explanatory discussion in the Alberta Directive. A “best practices” formulation, without definition, creates a platform for challenges from well opponents arguing that there is always something “better.” A particular measure may not be reasonable or technically practicable; but if it results in marginally lower sound levels, is it “best”? Others questioned whether the April 2015 proposal was appropriately grounded in any authorizing statute. PaDEP had cited the general nuisance-abatement provisions of Section 1917-A of Administrative Code43 (not Act 13) as the statutory basis for the proposed noise controls. That provision is directed to protection of the public against “unsanitary conditions and other nuisances,”44 and most specifically empowers PaDEP to investigate nuisances45 and “order such nuisances including those detrimental to the public health to be abated and removed ….”46 Section 1917-A does not make any reference to “noise,” nor does it imbue the PaDEP with powers to establish standards on every possible subject or activity that might, under certain circumstances, give rise to a “nuisance.” While some Pennsylvania environmental statutes, such as the Clean Streams Law and Air Pollution Control Act, provide for establishment of standards governing air and water pollution, and declare that violation of those standards constitutes a “public nuisance,” Section 1917-A does not contain such a standard setting provision. On August 12, 2015, PaDEP issued a news release and posted a further revised “Draft Final Rulemaking” package,47 in which it retreated from promulgating the proposed noise control provisions. In doing so, PaDEP stated: “The Department decided not to include [§78a.41] in the draft final rulemaking. Instead, given the complex nature of the technical issues surrounding noise mitigation, the Department plans to develop a best management practices guidance document which may serve as the basis for future rulemaking on the topic.” Clearly, more to come in the months ahead as the agency contemplates drafting of a “guidance document” on the noise topic.

43 71 P.S. § 510-17. 44 Id. § 510-17(1). 45 Id. § 510-17(2). 46 Id. § 510-17(3). 47 Available at: http://files.dep.state.pa.us/OilGas/BOGM/BOGMPortalFiles/TechnicalAdvisoryBoard/2015/Sept ember%202/Summary%20of%20Changes%20- %20Subchapter%20C%20Draft%20Final%20Regulation.pdf.

-12- 3. Ohio

Unlike in Pennsylvania, Ohio’s primary oil and gas law (Ohio Revised Code Chapter 1509) explicitly provides the Ohio Department of Natural Resources (“ODNR”) with the authority to adopt regulations regarding noise mitigation with respect to (1) wells and production facilities in urbanized areas and (2) horizontal wells and associated production facilities.48 ODNR promulgated a rule in 2005 with respect to urbanized areas providing that “[d]rilling, well servicing and well site maintenance operations in urbanized areas shall be conducted in a manner to mitigate noise, including the reasonable use of screening and appropriate mufflers on drilling and servicing equipment.”49 “Urbanized areas” are defined to include any municipality with a population of more than 5,000 residents according to the most recent federal census.50 ODNR has yet to promulgate noise control rules with respect to horizontal wells (the language in ORC 1509 authorizing the promulgation of noise control rules for horizontal wells was not added until 2012).51 Thus, under Ohio’s regime, the state requires all oil and gas operators with wells and production facilities in municipalities of more than 5,000 residents to mitigate noise, including the “reasonable use” of screening and “appropriate” mufflers. Ohio’s oil and gas law and regulations also establish minimum setback requirements (typically 100–200 feet) from occupied dwellings and property lines.52 Otherwise, noise control of oil and gas facilities is governed by the common law and local governments, to the extent not preempted by ORC Chapter 1509.53

4. West Virginia

In December 2011, West Virginia enacted its Natural Gas Horizontal Well Control Act54 in response to the recent proliferation of shale gas production activities in the state. Among its many new standards for horizontal wells, the Act established new well location restrictions requiring the center of all new horizontal well pads to be located at least 625 feet from any existing occupied dwelling.55 To assess the adequacy of this setback restriction, the Act required

48 ORC § 1509.03(A)(6). 49 OAC § 1501:9-9-03(I) (emphasis added). 50 ORC § 1509.01(Y); OAC § 1501:9-1-01(A)(51). 51 See Ohio S.B. 315 (June 11, 2012). 52 See ORC § 1509.021; OAC § 1501:9-1-05. 53 See ORC § 1509.02; State ex rel. Morrison v. Beck Energy Corp., Slip Op. No. 2015-Ohio- 485, 2015 WL 687475 (Feb. 17, 2015) (holding that ORC § 1509.02 preempts five City of Monroe Falls ordinances regulating oil and gas operations). 54 West Virginia H.B. 401, passed December 14, 2011, codified at W.Va. Code Ch. 22, Art. 6A. 55 W.Va. Code § 22-6A-12(a).

-13- the West Virginia Department of Environmental Protection (“WVDEP”) to report to the legislature “on the noise, light, dust, and volatile organic compounds generated by the drilling of horizontal wells as they relate to the well location restrictions regarding occupied dwelling structures[.]”56 In response to this statutory mandate, WVDEP commissioned a study by the West Virginia University (“WVU”) School of Public Health on air, noise, and light emissions from the drilling of horizontal gas wells.57 WVU conducted monitoring activities at seven well pads for at least six days each, obtaining one-minute and one-hour noise measurements around the well pads in various stages of development (site preparation, drilling, hydraulic fracturing, flowback, and completion). WVU’s monitoring results indicated that, while noise levels at monitored locations occasionally exceeded 85 dBA, they were below the EPA “Levels Document” guideline of 70 dBA averaged over a 24-hour period (the level necessary to prevent measurable hearing loss if experienced consistently over a lifetime).58 However, WVU’s monitoring data also indicated that noise levels were frequently above 55 dBA, the EPA guideline for preventing outdoor activity from interfering with the ability to hear and causing annoyance.59 The study ultimately concluded that the 625 foot setback from the center of the pad would not assure that residences would be unexposed to contaminants (including sound) from drilling site activity, but that there was no simple solution to specifying a single setback distance that would eliminate all potential exposures.60 The final study report also identified several methods for potentially reducing noise levels, particularly with respect to truck traffic, borrowing from methods typically adopted during highway construction (such as sound barriers, vegetation, building insulation, site selection, and installation of sound meters).61 Based on the results of WVU’s study, WVDEP provided a report to the West Virginia Legislature on May 28, 2013.62 WVDEP’s report recounted the study’s key findings with respect to noise and indicated that WVDEP had shared the study’s recommended noise reduction practices with the regulated community.63 The report indicated that WVDEP works with

56 Id. § 22-6A-12(e). 57 Air, Noise, and Light Monitoring Results For Assessing Environmental Impacts of Horizontal Gas Well Drilling Operations (ETD-10 Project), Prepared for WVDEP Division of Air Quality, Submitted by Michael McCawley, PhD, WVU School of Public Health (May 3, 2013). 58 Id. at 2, 9, 18; EPA Condensed Levels Document at 17. 59 Id. at 9–10, 18; EPA Condensed Levels Document at 24. 60 Id. at 19. 61 Id. at 21. 62 WVDEP, Noise, Light, Dust, and Volatile Organic Compounds Generated by the Drilling of Horizontal Wells Related to the Well Location Restriction Regarding Occupied Dwelling Structures (May 28, 2013). 63 Id. at 3.

-14- individual operators and companies on a case-by-case basis to facilitate discussion and resolve citizen noise complaints, and that WVDEP inspectors would continue to work with operators to deploy sound mitigation measures, such as sound barriers, based on site specific circumstances.64 WVDEP’s report ultimately recommended that the legislature consider adopting a location restriction for occupied dwellings that relied on the limit of disturbance of the pad rather than its center point, and made no further recommendations with respect to noise controls.65 Neither WVDEP nor the legislature has taken action to regulate noise from oil and gas operations as a result of the study.

5. Texas

Texas, like West Virginia, does not directly regulate noise from oil and gas operations through any statewide law or regulation. This is made clear on the Texas Railroad Commission’s website, which explains: “The Railroad Commission of Texas has no statutory authority over noise or nuisance related issues. Noise and nuisance related issues are governed by local ordinances.”66 This continues to be the case even after the Texas legislature, on May 18, 2015, enacted H.B. 40, a bill intended to “expressly preempt the regulation of oil and gas operations by municipalities and other political subdivisions[.]”67 While H.B. 40 imposes new limits on the authority of local governments to regulate oil and gas operations, it preserves municipal power to enact “commercially reasonable” ordinances governing “aboveground activity,” including regulations controlling noise, light, traffic, and other quintessentially local concerns.68 At the local level, the City of Fort Worth, Texas has adopted what some consider to be a model local ordinance concerning natural gas operations in urban areas.69 This ordinance includes noise control provisions that apply specifically to natural gas wells and compressors.70 In light of these natural gas-specific noise regulations, gas drilling and production operations are exempted from the City’s broadly applicable noise ordinance.71 With regard to wells, the Fort Worth natural gas ordinance requires operators to submit a noise management plan, approved by the gas inspector, detailing how the equipment used in

64 Id. 65 Id. at 5. 66 http://www.rrc.state.tx.us/oil-gas/complaints/. 67 Texas H.B. 40, § 1 (May 18, 2015). 68 Id. § 2; Tex. Nat. Res. Code § 81.0523(c). 69 Fort Worth City Code, Chapter 15. 70 Id. § 15-42(b), (d)(1). 71 Id. § 23-8(e)(7).

-15- drilling, completion, transportation, and production of a well complies with specified maximum permissible noise levels.72 The plan must identify operation noise impacts, provide documentation establishing the ambient noise level prior to construction, and detail how impacts will be mitigated, considering (among other factors) the nature and proximity of adjacent developments, weather and wind patterns, vegetative cover, and topography.73 The ordinance prohibits gas well operations that create noise, “measured at the protected use receiver’s/receptor’s property line or from the closest exterior point of the protected use structure or inside the protected use structure if access to the property is granted by the receiver/receptor,” that exceed the ambient noise level by more than: x 5 decibels during daytime hours; x 3 decibels during nighttime hours; and x 10 decibels over the daytime average ambient noise level during fracturing operations (fracturing is prohibited during nighttime hours).74 Upward adjustments of 10, 15, or 20 dBA to these noise standards “may be permitted intermittently” for short duration increases (e.g., a 10 dBA adjustment is permitted for a maximum of 5 cumulative minutes during any one hour).75 Operators are also prohibited from creating pure tones and low frequency noises above specified levels.76 Gas well operators must conduct and report the results of ambient noise monitoring over a 72-hour pre-drilling period to establish the background ambient noise level.77 Then, once operations commence, operators must continuously monitor all gas wells within 600 feet of a protected use to ensure compliance with these standards.78 The ordinance permits, but does not require, the use of acoustical blankets, sounds walls, mufflers and other methods approved by the gas inspector to ensure compliance, and all soundproofing must comply with accepted industry standards and is subject to approval by the City’s fire department.79 The City may issue citations for violations of the noise standards, but if a violation occurs while the operator is in compliance

72 Id. § 15-42(b)(1). 73 Id. 74 Id. § 15-42(b)(2)a.–b. 75 Id. § 15-52(b)(4). 76 Id. § 15-42(b)(2)d.–e. 77 Id. § 15-42(b)(3). 78 Id. § 15-42(b)(6). 79 Id. § 15-42(b)(7).

-16- with its approved noise management plan, the operator must first be given 24 hours to correct the violation.80 With respect to compressors (both at the well site and along pipelines), the ordinance establishes the following maximum permitted sound levels, measured at the property line of the receiver/receptor:81

Industrial 75 dBA day / 65 dBA night Commercial 65 dBA day / 55 dBA night Residential 55 dBA day / 50 dBA night

The ordinance allows pipeline compressor operators to demonstrate that the current actual ambient noise level is above these levels.82 Certain allowances are also made for temporary lift compressors at well sites, while permanent lift compressors are required to comply with additional standards regarding the use of acoustical structures, such as a prohibition on the use of sound blankets.83 Fort Worth’s detailed oil and gas noise regulations have the benefit of establishing clear requirements for the regulated community. However, the rules also introduce potentially time- consuming and costly obligations, such as mandatory noise management plans and pre-and post- drilling ambient noise monitoring, which would be difficult to justify in less populated settings.

6. Colorado

Unlike the states discussed in the preceding paragraphs, Colorado has adopted detailed statewide oil and gas-specific noise control regulations. These noise abatement requirements appear at § 802 of the Colorado Oil and Gas Conservation Commission’s (“COGCC”) oil and gas rules.84

COGCC’s noise control regulations require oil and gas operations at any well site, production facility, or gas facility (defined to include all facilities that process or compress

80 Id. § 15-42(b)(9). 81 Id. § 15-42(d)(1). 82 Id. § 15-42(d)(1)b. 83 Id. § 15-42(d)(2)b. 84 2 CCR § 401-1:802 (“COGCC Rule 802”)

-17- natural gas prior to the point of transfer to a carrier for transportation)85 to comply with the following maximum permissible noise levels:86

ZONE 7:00 am to 7:00 pm 7:00 pm to 7:00 am Residential/Agricultural/Rural 55 dBA 50 dBA Commercial 60 dBA 55 dBA Light industrial 70 dBA 65 dBA Industrial 80 dBA 75 dBA

These noise levels may be increased 10 dBA for periods not to exceed 15 minutes in any one hour period during the daytime (7:00 am to 7:00 pm). The allowable noise level for “periodic, impulsive or shrill noises” is reduced by 5 dBA from the above levels.87

Compliance with these noise standards is ordinarily determined through measurements taken 350 feet from the noise source. However, if an oil and gas facility is installed closer than 350 feet from an existing occupied structure, sound is measured at a point 25 feet from the structure towards to the noise source. If measurements at 350 feet would be impractical or unrepresentative due to topography, they may be taken at a lesser distance and extrapolated to 350 feet using a mathematical formula. A complainant may also request measurement at a further distance in order to obtain a more representative noise sample.88 When low frequency noise may be an issue, the COGCC will take additional measurements 25 feet from the occupied structure towards the noise source and, if the reading exceeds 65 dBC, require the operator to obtain a low frequency impact analysis by a qualified sound expert.89

Measurements are to be taken four feet above ground level, when wind is not more than 5 miles per hour.90 Results are determined by averaging minute-by-minute measurements made over a minimum 15 minute sample duration (if practicable).91 Furthermore, “[i]n all sound level measurements, the existing ambient noise level from all other sources in the encompassing environment at the time and place of such sound level measurement shall be considered to determine the contribution to the sound level by the oil and gas operation(s).”92

85 COGCC Rule 100. 86 COGCC Rule 802.b. 87 Id. 88 COGCC Rule 802.c.(1) 89 COGCC Rule 802.d. 90 COGCC Rule 802.c.(2)–(3). 91 COGCC Rule 802.c.(4). 92 COGCC Rule 802.c.(5).

-18- The applicable land use designation is determined by COGCC in consultation with the local government, taking into account (but not definitively decided by) any local zoning designation.93 However, the maximum noise level for industrial zones applies to all operations involving pipeline or gas facility installation or maintenance, the use of a drilling rig, completion rig, workover rig, or stimulation94 (unless the operation is within certain designated setback locations, in which case the light industrial zone designation applies).95 In remote locations where there is no “reasonably proximate” occupied structure or “Designated Outside Activity Area” (such as a playground or park),96 “the light industrial standard may be applicable.”97

Colorado’s rules do not dictate the use of any particular noise control practices, other than a requirement to equip non-electric engines and motors with quiet design mufflers “or equivalent” if within 400 feet of residential and commercial buildings.98 Thus, the rules provide significant leeway to operators to decide how to achieve compliance with the applicable maximum noise level.

7. Alberta, Canada

The Canadian province of Alberta is often regarded as having one of the most comprehensive noise control regimes for the energy industry in North America. Alberta’s Directive 038, which is enforced by the Alberta Energy Regulator (“AER”), establishes noise controls for a variety of licensed energy generation activities, including operations involving oil and gas, coal, oil sands, fossil fuel fired electric generation plants and wind energy development.99 The Directive is designed to address environmental noise, not health related impacts (such as noise-induced hearing loss), aiming to ensure that covered energy facilities do “not adversely affect indoor noise levels for residents near the facility.”100 Directive 038 considers noise at the point of the receptor rather than at the property line, “allow[ing] a licensee to take maximum advantage of the normally substantial distance in rural areas between a facility and any dwellings.”101 The only exception is for facilities in remote

93 COGCC Rule 802.b. 94 COGCC Rule 802.b.(1). 95 COGCC Rule 604.c.(2)A. 96 COGCC Rule 100. 97 COGCC Rule 802.b.(2). 98 COGCC Rule 802.f. 99 AER Directive 038: Noise Control, § 1.4 (Feb. 16, 2007). 100 Id. §§ 1.1, 1.2.1. 101 Id. § 1.2.2.

-19- areas where no receptor is present, in which case a permissible sound level of 40 dBA energy equivalent sound level (“Leq”)102 at nighttime must be met at 1.5 km.103 For all other facilities, the permissible sound level is determined using a basic sound level (“BSL”) plus a series of potential adjustments.104 The BSL (which applies during the night) ranges from 40 to 56 dBA Leq depending on the density of development in the area.105 A +10 dBA Leq adjustment is made for daytime noises (from 7 a.m to 10 p.m).106 “Class A” adjustments may be made based on the season (+5 dBA Leq during the winter) and the monitored ambient sound level in the area (ranging from -10 to +10 dBA Leq).107 “Class B” adjustments may be made if the activity will only last for a short duration; the maximum Class B adjustment is +15 dBA Leq for an activity lasting only one day; the minimum is +5 dBA Leq for an activity lasting up to 60 days.108 The Directive also recognizes that there will be some “special cases” where the permissible sound levels should be adjusted based on exceptional site- specific circumstances.109 Before submitting an application for a new facility or modification to an existing facility, Directive 038 requires licensees to conduct a noise impact assessment (“NIA”) if there is a “reasonable expectation” of a continuous noise source or changes to existing noise sources.110 “Drilling and servicing rigs,” however, are considered to be only temporary activities that generally do not require an NIA.111 For those oil and gas activities requiring an NIA, licensees must model the predicted sound level for the facility once put into operation.112 The modeled cumulative noise level in the area (including the proposed facility) must not exceed the applicable permissible sound level.113

102 Energy equivalent sound level (Leq) “is the average weighted sound level over a specified period of time. It is a single-number representation of the cumulative acoustical energy measure over a time period interval.” Id. Appendix 1. The Leq concept is described in greater detail in Appendix 3 of Directive 038. 103 Id. §§ 1.2.2, 2.1. 104 Id. § 2.1. 105 Id. § 2.1.1 106 Id. § 2.1.2.1. 107 Id. § 2.1.2.2. 108 Id. § 2.1.2.3. 109 Id. § 2.1.3. 110 Id. § 3.2. 111 Id. 112 Id. §§ 3.1, 3.5. 113 Id. § 3.4.

-20- Directive 038 establishes a rigorous noise complaint investigation process to ensure that facilities are in compliance with permissible sound levels.114 Alternatively, if for some reason a compliance survey is not practical, a detailed “Noise Management Plan” approved by AER can be used to establish compliance.115 While noise from heavy truck traffic is not specifically addressed in the Directive, the Directive indicates that receipt of a complaint with regard to oil and gas-related truck traffic may require corrective action from the licensee on a site-specific basis.116 Oil and gas licensees are “expected to take every reasonable measure to avoid or minimize the noise impacts of heavy truck traffic and vibration.”117 Finally, the Alberta Directive “encourage[s],” but does not require, all licensees to adopt and incorporate a “best practices approach” to noise management.118 This stands in contrast to the regulations proposed by Pennsylvania in April 2015, which would have mandated operators to adopt and incorporate a best practices approach, without specifying what is included in such an approach.119 For its part, Directive 038 indicates that a best practices approach “may include such things as taking regular fence-line measurements to determine if there are any significant changes to sound emanating from the facility and improving notification measures to neighbours of a planned noisy event.”120 Relatedly, the Directive also indicates that, during the noise impact assessment planning process, licensees should consider adopting “best practical technology (accounting for cost versus benefit) … to minimize the potential noise impact to existing dwellings.”121 This brief evaluation only skims the technical aspects of determining permissible sound levels, modeling and monitoring noise levels, and investigating compliance under Directive 038. In this regard, Directive 038 is significantly more detailed than the state and local noise mitigation schemes discussed in the preceding sections of the paper. In the future, it would not be surprising if U.S. regulators considered and borrowed some of the concepts from Alberta Directive 038 for inclusion in their own regulatory programs.

114 Id. §4; see also id. § 1.4.1. 115 Id. § 5.1; see also id. § 1.4.1. 116 Id. § 1.4.1 117 Id. 118 Id. § 1.2.4. 119 25 Pa. Code § 78a.41(a)(3) (DRAFT Mar. 9, 2015). 120 Directive 038, § 1.2.4. 121 Id. § 3.1.

-21- F. CONCLUSION

Noise generation, management and mitigation is, and will remain, an ongoing challenge for the shale oil and gas sector. Development of shale plays bring oil and gas operators into the proximity of numerous communities across the nation which heretofore have had little to no contact with the industry. While many of the noise impacts of shale play surface operations are relatively temporary in nature, neighbors and communities who have been accustomed to the quietude of the rural landscape may be intolerant of even temporary intrusions. Regulatory responses to such noise issues continue to evolve, much as have evolved regulatory programs in on environmental topics. An important opportunity for the industry would be to move from a reactive to a proactive stance, formulating and advocating approaches that are flexible and adaptive to particular conditions, cost-effective and practical.

-22-   
      

$,)-$.
 & /',01    2,& 34 ! 56 6
%7!!  ! "$834 ! 56 6
%69% "  #$ % :$..-$) ;1  '0' ),:
 : <&'(   =   >* *              >  *  >              *    > *     &'( !! :: * >      (          >*   ?* > >    & ! > -    & 0 $  & 0 #  >

  ::   (* >2 #*) * >* )*&* )* )*+ ::      > >   ( & -   > >/   ( $ * >$ @ ) " #>>&) ( * >:)*>* > * >.#>:>* > )*&

::>* *1 <      > The Ethics of Downsizing: A Lawyer’s Professional Obligations in a Reduction-in-Force

Mark Konkel, Kelley Drye & Warren LLP

6th Law of Shale Plays Conference September 10 & 11, 2015, Pittsburgh, Pennsylvania

A. Introduction

The collapse of oil prices since last summer has led to significant reductions-in-force (“RIF”) by producers and service companies, and the host of employment law issues that come with them have become a fact of life in the industry.

Apart from the myriad concerns, complications, and laws that impact the way a RIF can and should be conducted, lawyers must be aware of hidden ethical considerations as they guide their internal and external clients through a RIF. This presentation will identify and examine these and other concerns:

B. Who is the “client” in a RIF?

It is important to properly identify who, or what, exactly, constitutes the “client” for attorneys assisting in a company’s reduction in force. The ethical obligations imposed on lawyers are a set of duties – loyalty, zealous advocacy, privilege, and confidentiality – owed by the lawyer to the client. These obligations and responsibilities are owed to the client exclusively. Therefore, properly identifying the “client” is essential for a lawyer assisting a client with a RIF.

Model Rule 1.13(a), which most states have adopted a version of, adopts the “entity theory” of representation for situations when a lawyer is engaged to represent a formal legal entity or organization, such as a corporation. This rule states:

A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.

By representing the entity, the lawyer does not, as a matter of course, become the lawyer for any of the entity’s officers, directors, or employees. The corporation is a legal unit with a status of its own, separate from its directors, officers, and employees. This “entity theory” is in accord with the basic principles of corporate law – a corporate entity is a legal person distinct from its own constituents, and the entity’s officer and employees are co-agents of the corporate principal.

When a director or officer of a corporation retains a lawyer for the company, the lawyer has actually been retained by the company. Therefore, the corporate agents who hired the attorney are not the attorney’s clients. Just because an agent for the corporation hires another agent for the corporation, such as an attorney to assist in a RIF, the second agent does not become a subagent of the first. The two are co-agents, and owe allegiance to their common principal, rather than to each other.

1 This rule applies to both outside and in-house counsel, and attorneys in both roles owe undivided loyalty to the corporation. Only the company or the organization is the lawyer’s client, unless the lawyer specifically and additionally undertakes representation of individual employees of the company. If this has not occurred, the company’s employees are not the attorney’s clients, and must be treated accordingly.

Identifying who the client is when representing a corporate entity is critical to avoid conflicts of interest, which is discussed in further detail below. The lawyer must determinate what the interest of the company are, and act in the pursuit of those interest.

C. How far down the chain of command does the attorney-client privilege extend?

The attorney-client privilege exists to protect communications between an attorney and his client relating to matters in which the attorney represents the client. As discussed above, when a company hires an attorney, or when in-house counsel acts in the role of attorney for the company, the “client” is actually the company itself. This presents somewhat of a problem, as the company is a “fictitious” legal creation. It cannot communicate with an attorney by itself, and therefore the company’s attorney will communicate with high-ranking individuals within the company about matters relating to the attorney’s representation of the company. This can lead to confusion as to which communications are protected by the attorney-client privilege.

Absent a special agreement authorizing an attorney to represent the company as well as certain directors, officers, or employees of the company, the attorney is a co-agent of the organization, along with even the highest-ranking individuals within the organization. The attorney is not a sub-agent, and all co-agents are required to serve the interest of the company. High-ranking individuals within the organization are not “clients” of the company’s attorney, and are not represented by any lawyer unless they have made separate arrangements. High- ranking company employees may frequently assume that the company’s lawyer is also “their” lawyer. This is extremely common when the high-ranking individual is actually the person who engaged that lawyer’s services on behalf of the company. In order for the privilege to apply to communications with the company’s attorney, the attorney must be giving legal advice as it relates to the company, not merely speaking to a high-ranking company official. This rule also applies to in-house counsel. Just because an attorney is placed on a corporation’s payroll rather than billing the corporation in six-minute increments does not mean that different ethical constraints apply. The lawyer functions for the entity, and provides legal advice for the company.

However, when there is no internal legal conflict, the lawyer best serves the company by taking direction from and giving advice to high-ranking individuals within the organization. Under normal circumstances, these high-ranking individuals are the “eyes and ears” of the organization, and are authorized by the organization to communication with the lawyer. Even lower level employees will be considered as acting “on behalf of the company” in regards to communications relating to matters within the scope of their job responsibilities. In situations where employees who are not directors or officer of the corporation receive confidential communications with the company’s attorney, the accepted rule is that communication by the company’s attorney of confidential information to an employee, alone, is not waiver of any other

2 confidential communication to or with the company. In these situations, the attorney-client privilege can apply to relevant communications involving the company’s attorney.

It is important to keep in mind that the attorney-client privilege only apples to communications where legal advice was sought or rendered, and which was indented to be and was kept confidential. This means that not every communication between the attorney and a director, officer, or employee of the corporation is covered by the attorney-client privilege. The attorney-client privilege does not protect communications where the attorney serves the client solely as a business advisor. Communications about the corporation’s affairs between corporate counsel and officers, directors, employees or shareholders are not confidential if they do not relate to the attorney providing legal advice or guidance. On the other hand, the rendition of advice, and preparation of correspondence or legal documents for a high-ranking individual within the corporation, in the affairs of the corporation, is usually considered a legal service for the entity and not for the individual, and therefore covered by the attorney-client privilege.

Additionally, the communication must be “confidential” to be covered by the attorney- client privilege. This means that if the communication involves a person that is not acting on behalf of the company or within the scope of their responsibilities in their company position, the privilege may be waived. For this reason, it is important to only involve necessary parties in RIF-related conversations in which an attorney for the company is giving legal advice. Avoid “cc-ing” unnecessary parties, or inviting unnecessary persons to meetings where these conversations occur.

In-house counsel may often occupy dual positions or perform a variety of functions, some of which do not involve legal services. When this occurs, courts often look to see whether the primary function being performed was legal or not. Non-legal functions involve gathering facts, being a negotiator, giving business advice, or action taken as a business agent. The specific role the attorney plays during the RIF process will dictate whether privilege applies to communications involving the attorney.

For example the case of Somo v. Chevron Products, U.S.A., 2008 WL 4152962 (Cal. App. Sept. 10, 2008) dealt with the privileged status of email communications between in-house counsel, outside counsel, and Chevron. Chevron argued that the email communications were privileged and protected from production. The court, however, disagreed, and ordered production. The court stated “contrary to Chevron’s argument, the evidence in the record supports an inference that Chevron in-house counsel may have been performing business functions, raising the question about whether the communications involved legal opinions or advice.” Chevron did not present any evidence showing that “its internal counsel’s involvement was primarily for the purpose of providing legal advice, as opposed to business advice or corporate policies relating to Chevron’s real estate activities and regulatory compliance.”

In another troubling case, Oracle America v. Google, No. 10-03561, 2011 WL 5024457 (N.D. Cal. Oct. 20, 2011), concerned an email directed to in-house counsel concerning research conducted by an engineer, at the direction of the company’s general counsel, as part of a plan to help the general counsel render legal advice regarding an anticipated lawsuit. The court found that the content of the email focused on business considerations, not legal negotiations, and therefore was not protected by the attorney-client privilege. These types of business-related

3 communications are common in the RIF process, and may not be protected by privilege unless they relate to the provision of legal advice. Merely stamping a document or communications “attorney client privilege” or including in-house counsel on an email chain will not automatically protect the communication.

The test for whether privilege will apply to a communication with the company’s attorney can often be expressed as: (1) was the communication made for purpose of securing legal advice; (2) did the employee made communication at corporate superior’s direction; (3) did the superior made request so corporation could secure legal advice; (4) was the communication subject matter is within scope of employee's corporate duties; and (5) was the communication not disseminated beyond persons who, because of corporate structure, need to know its contents.

The lawyer should be aware that pure fact gathering (e.g., to determine where to relocate a working group of employees) will not be deemed legal advice and privilege will not apply. If fact gathering is intertwined with legal analysis (e.g., to determine whether a terminated employee has discrimination claim), the communication relates to legal advice and privilege applies. While the request for legal advice does not have to be explicit (i.e. “Please give me your legal opinion on the following subject”), the communication must be made in connection with request for legal advice. Mixed communications (communications that contain both legal and non-legal advice) must be treated with caution. If the communication is predominantly concerned with legal requirements or opportunities, the attorney-client privilege will apply. The timing of these communications may also be a factor; a report circulated among business people and later given to lawyer may be deemed a business (non-legal) communication. However, entire mixed communication may be privileged if non-legal communications were integral to legal advice.

D. What is the scope of the duty of confidentiality in a RIF?

An attorney’s ethical obligations to protect and keep confidential all information and communications relating to their representation of their client also applies in the RIF context. Model Rule 1.6(a), which most states have adopted a version of, states:

A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation, [or the disclosure otherwise permitted by the governing ethical rules]

The “otherwise permitted” situations where an attorney may reveal confidential client information are outlined in Model Rule 1.6(b), which most states have adopted a version of:

(b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:

(1) to prevent reasonably certain death or substantial bodily harm;

(2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or

4 property of another and in furtherance of which the client has used or is using the lawyer's services;

(3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client's commission of a crime or fraud in furtherance of which the client has used the lawyer's services;

(4) to secure legal advice about the lawyer's compliance with these Rules;

(5) to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer's representation of the client;

(6) to comply with other law or a court order; or

(7) to detect and resolve conflicts of interest arising from the lawyer’s change of employment or from changes in the composition or ownership of a firm, but only if the revealed information would not compromise the attorney-client privilege or otherwise prejudice the client.

As is clear, an attorney for a corporation is bound to keep confidential all information relating to the representation of the company. As discussed above, confidential communications that relate to or concern the provision of legal advice will be protected by the attorney-client privilege. Hence, in any subsequent investigation or litigation, the company cannot be compelled to produce these communications.

E. How do ethical rules affect the attorney’s communications with managers and supervisors?

In the course of the RIF process, an attorney will have various interactions and communications with manager and supervisors that work for the employer. These interactions are a necessary part of the information gathering and due diligence functions attorneys carry out during a RIF. However, during these interactions, it is important to keep the governing ethical rules in mind.

As discussed above, the “client” is the company, not the employees of the company. Hence, the managers and supervisors that the attorney interacts with are non-clients, and must be dealt with accordingly. Model Rule 1.13(f) generally requires a lawyer who is dealing on behalf of a client with an unrepresented third party to disclose his interests:

In dealing with an organization's directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization's interests are adverse to those of the constituents with whom the lawyer is dealing.

5 Frequently, the interests of the managers and supervisors of the company will align with the interests of the company. In these situations, there is no obligation for the attorney to remind the manager or supervisor that he or she is not “their attorney.” The attorney will interact with supervisors and managers in a cordial and non-adversarial manner, proceeding in the same fashion as if these individuals were they attorney’s actual clients.

However, if a situation arises where the lawyer knows or reasonably should know that the company’s interests are adverse to those of the supervisor or manager, the attorney has an ethical obligation to disclose the fact that he does not represent the manager or supervisor, and, in fact, represents the company and the company’s interests exclusively. In these situations, when it becomes apparent that a split is developing between the corporations’ best interests and a certain manager or supervisor, the lawyer’s ethical obligations in representing the company kick in. They lawyer must remind himself that his first priority is serving the interests of the entity client.

While a lawyer may be tempted to “sniff out” every detail he can from a supervisor that may have been acting against the company’s best interests, the ethical duty of zealous representation has its limits. Third parties, such as employees within the company, have certain rights, and a lawyer for the company cannot fly a “false flag” in order to get the individual to reveal information to a lawyer who, once things shake out, may actually be the lawyer of that individual’s adversary (the company).

Model Rule 4.3 states:

In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstand the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding. The lawyer shall not give legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interest of such a person are or have a reasonable possibility of being in conflict with the interests of the client.

Therefore, even if the information would be useful to the company-client, Model Rules 1.13(f) and 4.3 forbid a lawyer from taking unfair advantage of managers or supervisors that are non- clients in these types of situations.

There is no obligation for the attorney to make a clarifying statement unless the lawyer knows or reasonable should know that the interests of the company-client and the manager or supervisor are in conflict. Even when this occurs, the lawyer is not required to give a long, detailed explanation of the situation to the individual; all that is required is a short, simple statement “explaining the identity of the client.” This means the lawyer should inform the manager or supervisor that the client is the company, and not the individual.

Attorneys for a corporation must be mindful of the fact that they cannot represent an employee with whom corporation has conflict. However, a person who sought to become a client can assert privilege, as an attorney-client relationship may have inadvertently been created. If corporate counsel’s overbroad statement gives an employee a reasonable basis to believe

6 counsel might be available to serve as her personal attorney, corporate counsel cannot reveal employee’s statement. This can cause a conflict issue, requiring the attorney with withdraw from his representation of the company. The attorney should take active steps to avoid this situation.

When a lawyer represents only the corporation and communicates with officers, directors, or employees, the issue is whether the officer, director, or employee can claim an attorney-client relationship. The rule is that those communications do not ordinarily give rise to representation of the officer, director, or employee. To avoid any confusion, the risk of a potential conflict arising due to an unintentional joint representation can be minimized by giving an “Upjohn” warning, also referred to as the “Corporate Miranda” warning.

Before initiating any investigation that may arise out of the RIF process, the following type of disclosure statement (taken from the American Bar Association’s White Collar Crime Committee Working Group’s “Suggested Upjohn Warning”) should be made:

“I am a lawyer for or from Corporation A. I represent only Corporation A, and I do not represent you personally.

I am conducting this interview to gather facts in order to provide legal advice for Corporation A. This interview is part of an investigation to determine the facts and circumstances of X in order to advise Corporation A how best to proceed.

Your communications with me are protected by the attorney-client privilege. But the attorney-client privilege belongs solely to Corporation A, not you. That means that Corporation A alone may elect to waive the attorney-client privilege and reveal our discussion to third parties. Corporation A alone may decide to waive the privilege and disclose this discussion to such third parties as federal or state agencies, at its sole discretion, and without notifying you.

In order for this discussion to be subject to the privilege, it must be kept in confidence. In other words, with the exception of your own attorney, you may not disclose the substance of this interview to any third party, including other employees or anyone outside of the company. You may discuss the facts of what happened but you may not discuss this discussion.

Do you have any questions?

Are you willing to proceed?”

While giving this type of warning may seem unnatural or uncomfortable, failure to make this type of statement runs the risk of exposing the company and company’s attorney to potential adverse claims and sanctions from not providing such a warning, or to the created of a potential conflict of interest arising from inadvertent dual representation. Opening conversations with an Upjohn statement helps eliminate these risks.

Additionally, attorneys should consider the risk of disqualification due to being a witness on a material subject in dispute. If the attorney’s testimony is necessary on a material issue, the

7 attorney may be disqualified. This provides an additional reason to keep the corporate attorney’s involvement in RIF proceedings to solely providing legal advice.

F. What are the rules for ex parte communications with potential claimants?

If an employee is informed they are being laid-off, the employee may react negatively. Some employees may even threaten to file a lawsuit, believing they were unjustly or unlawfully fired. Whether or not such a claim has merit may be determined at a later date, but the question during the RIF process is: how does the employer continue its communications with this individual?

A lawyer’s ethical obligations prevent him or her from conducting ex parte communications with represented individuals – meaning that the attorney for an employer should not be communicating directly with an employee or former employee that is represented by an attorney in a matter adverse to the employer. As for the rule governing this situation, most states have adopted a version of Model Rule 4.2, which states:

In representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized to do so by law or a court order.

The key language here is that this prohibition on communication only applies to communications with individuals that the lawyer knows to be represented by another lawyer. Once the employee or ex-employee has “lawyered up,” communications with that individual must be conducted through their lawyer. However, prior to obtaining knowledge that the individual is represented by an attorney, the attorney for the employer is free to communicate directly with that individual.

It is important to remember that this prohibition on ex parte communications by the employer’s lawyer attaches regardless of whether the represented party initiated or consented to the communication. Even if the company’s attorney is contacted by a represented employee or ex-employee and that employee or ex-employee expresses agreement to discuss a subject related to the company, the rule still applies. If this type of situation occurs, the attorney should end the communication immediately and contact the individual’s attorney.

G. What potential conflicts of interest exist in a RIF scenario, and how do you avoid them?

Potential conflicts of interest can arise in a RIF scenario. When no conflict exists, the company’s attorney can take on representation of employees or officers of the company, and provide joint representation. However, conflicts arise when the best interests of the company and the interest of the individual are not aligned.

Model Rule 1.13(g) recognizes that, in many situations, it is appropriate for the company’s lawyer represent the company’s co-agents as clients, in addition to representing the company:

8 A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Rule 1.7. If the organization's consent to the dual representation is required by Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholders.

Model Rule 1.7 discusses conflicts of interests with current clients:

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

(2) the representation is not prohibited by law;

(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and

(4) each affected client gives informed consent, confirmed in writing.

Under these rules, it is clear that client consent is required for joint representation. This means the lawyer should consider whether he or she can accept new clients without adversely affecting the representation that they are already providing to the company. If the lawyer’s obligation would in any way compromise or interfere with his or her representation of the company, the lawyer must not take on the new representation.

For example, if an employee that is being laid off in the RIF threatens legal action against the company and some of the company’s directors, officers, or employees, the company’s lawyer may be asked to jointly represent the company and the directors, officers, or employees that are the subject of the threatened legal action. If the interests of all of these potential defendants are in harmony, the best strategy is to prepare a common defense with a shared attorney. However, if it becomes apparent that the interests of the director, officer, or employee are not aligned with the interests of the company (for example, if the individual was participating in illegal activities outside the scope of his employment that will be the focus of or negatively impact the threatened

9 litigation), there will be a conflict of interest. In this situation, the company’s attorney cannot take on representation of the individual.

It is important to identify these potential conflicts early on. If a dispute develops later in litigation, and the attorney has represented both sides leading up to the litigation, he can represent neither going forward.

Additionally, lawyers who provide legal advice for the company while simultaneously serving in a non-legal role for the company, may face a conflict of interest between the two roles. As both an officer and an attorney for the corporation, as a lawyer he owes his client a duty of loyalty to the corporate entity, which may or may not be coexistent with any duty owed to the board of directors or officers. The rule is that an attorney for the entity represents the entity, and does not represent its officer, directors, or employees. Consequently, corporate counsel usually can later represent a client adverse to the officers of an entity client.

H. The ethics of handling a whistleblower in a RIF context

During the RIF process, there is always the possibility that an employee, faced with the prospect of losing their job, will begin to make accusations concerning corporate wrongdoing. When a potential whistleblower emerges, the company’s attorney must be mindful of the ethical obligations that govern this type of situation.

First, attorneys should proceed with caution, and clearly identify who they are representing, as well as disclosing all those that they are not representing. As discussed above under Model Rule 1.13(f), the lawyer is only required to tell the individual that the lawyer is the company’s lawyer, and not theirs. The lawyer should inform the individual that they might want to obtain independent counsel, and that communications made to the lawyer cannot be kept from the company-client, and may not be protected by the attorney-client privilege. If there is any indication that the employee wants or is assuming a level of confidentiality that cannot be provided, the lawyer should remind them that this is not the situation, and must not actively mislead the unrepresented employee.

In the process of the RIF and any whistleblower investigation that stems from it, the attorney may interview employees and corporate officers. To avoid claims of personal representation, these contexts often warrant not only oral disclaimers of representation and the lack of confidentiality but also written confirmation in the form of non-engagement letters. Use best judgment depending on the circumstances.

If the lawyer, in their bet judgment, decides that giving the employee an individual warning would be in the best interest of the company client, they should do so. If there is a tension between achieving the best result for reaching, but not overreaching or breaching an ethical obligation with the whistleblowing non-client, the lawyer should attempt to balance these two interests by gathering as must information as possible for the company-client’s use, without stepping outside of the attorney’s ethical limits.

Additionally, the attorney must remind himself that his client is the company, and that he must always act in the best interests of the company. If the whistleblower accusations concern, for example, allegations that a high-ranking corporate executive engaged in fraud that has a

10 likelihood of causing substantial harm to the company, the attorney may have an obligation to report or investigation such accusations. While investigating accusations against high-ranking individuals within the company may be met with “disapproval,” the attorney’s ethical obligations require him to pursue the best interests of the company itself at all times.

I. Handling separation and settlement discussions in a RIF

The steps taken in the RIF process relating to the separation of employees and settlement discussions with departing employees are often numerous. It is important that an attorney guiding a company during a RIF let the company know that it should plan everything far in advance. There are many steps that must be taken ahead of time due to the laws in place that relate to terminating the employment of groups of employees.

For example, the WARN Act requires most employers with at least 100 workers to give 60 day’s notice before a plant closing or mass layoff. There are also many state-specific laws (often referred to as “mini-WARN” statutes) that govern these types of situations. Attorneys should be sure to provide legal advice to the company to avoid any liability under these statutes.

There are also payroll related considerations associated with a RIF. Many states have laws requiring that terminated employees be given their final paycheck with a short amount of time after their employment. For example, Texas requires that terminated employees be given their final paycheck within six days of discharge. California requires laid-off employees to be paid all wages owed at the time of termination. An attorney’s guidance on these subjects will be considered legal advice, and covered by the attorney-client privilege.

Employers should also draft release agreements in advance, which can be tied to severance pay that can buy the employer certain assurances, such as waiver of the laid-off employee’s right to sue for certain causes of action. While companies aren’t required to provide severance pay, doing so is often considered a best practice, as it allows the employer to get releases of claims from departing employees. It can be thought of as a type of insurance against future claims from disgruntled former employees.

However, there are also precautions that must be taken when drafting separation agreements. Such agreements must make it clear that the employer is not preventing the employee from filing a claim with a federal agency, or assisting in the investigation being conducted by a federal agency. There are also often mandatory waiting periods and windows of time where the employee is allowed to revoke the agreement. Attorneys for the company should provide guidance on the additional requirements and precautions that must be taken when drafting these types of agreements.

As discussed above, in-house counsel often serves dual roles for the company. When in- house counsel acts as a negotiator, rather than an attorney, caution should be used, as privilege may not apply to the attorney’s’ communications. If the attorney is acting as a negotiator in communications relating to a severance agreement, the attorney is acting in a role that could be carried out by a non-attorney. For this reason, privilege may not apply to these communications, and they should be treated accordingly.

11 J. RIF selection criteria and the ethics of access to personal information

One of the most important roles the company’s attorney plays during the RIF process is providing legal advice to assist the company in avoiding exposure to lawsuits from the employees that have their position eliminated in the RIF.

To meet his goal, attorneys may want to advice the company to create a “RIF Plan,” a written document describing the goals and reason for the RIF. It is advisable for this document to describe the criteria that will be used to decide which employees will be laid off during the RIF. This document can later be used in the defense of any lawsuits from employees alleging discrimination stemming from the RIF.

The specific selection criteria for the RIF will depend on the business needs of the company. Objective criteria, such as seniority, performance ratings, titles, job functions, education, certifications, attendance, or disciplinary records, are often “safe” criteria implemented by companies in a RIF. Subjective criteria, such as performance potential, leadership, effective communication, or teamwork abilities, are often sometimes used when making selections in a RIF. No matter what specific criteria is going to be used, the attorney should remind the company to apply the criteria consistently and confirm that the selected criteria confirm with the actual business reasons for the RIF.

Most importantly, attorneys must advice the client on how to conduct the RIF in a matter that is free from unlawful discrimination. This means that factors such as age, disability, race, gender, religion, national origin, pregnancy, sexual orientation, marital status, and familial status should not play any role in the RIF decision-making process. If any of these factors play a role in determining which employees will be laid-off, the company should expect a lawsuit (and, unfortunately, should often expect a lawsuit even when these factors are not part of the decision making process).

To avoid discrimination in a RIF, statements such as “we want to replace the old employees with younger employees” should never be made. Attorneys can assist the company in setting up programs or conducting training for the decision-makers in the RIF to help them avoid making these types of statements or allowing such potentially discriminatory factors to be taken into consideration in the RIF.

Employees selected in the RIF may later claim that the RIF was “pretext” for terminating their employment for an unlawful reason. To defend against this type of claim, the attorney should make sure the company is in a position where there are no inconsistencies or weaknesses in the RIF selection process and implementation, and be able to demonstrate the legitimate, non- discriminatory reason for its decision.

Laid-off employees may also bring “disparate impact” claims, and attempt to prove discrimination by showing that the company’s RIF procedure or selection criteria had a statistically disparate impact on a protected class. In general, EEOC guidelines state that a selection rate for any race, sex, or ethnic group that is less than 80 percent of the selection rate for the group with the highest selection rate as evidence of disparate impact. Courts may apply a more employer-friendly statistical analysis, but to preemptively protect against these types of

12 claims, the company’s attorney should advise the company to conduct statistical analyses in the RIF planning stages. If the data reveals that the impact of the RIF will disproportionately affect a particular protected class, the company should revisit its RIF selection criteria to ensure that only business-related criteria are in play.

Attorneys assisting a company with a RIF will also likely review or receive personal information concerning the company’s employees. There are many state-specific laws that protect a person’s medical information, banking information, social security information, and other personal information. The attorney should assist the company-client in complying with these laws, and should be mindful not to violate these laws themselves by disclosing this information to persons that are not required to view the information as part of the attorney’s representation of the company. This may require additional guidance in the post-RIF process and any related litigation stemming from the RIF. Such protected personal information should be redacted from any documents later produced in discovery.

13