The Oil and Gas Addendum

Imagine you just inherited a 200-acre farm in rural Butler County that has been in your family for decades. As a young child, you recall walking through one of the fields with your grandfather as he pointed out the remnants of two old gas wells. You remember your grandfather saying, “they have been there as long as I can remember.” Now that you own the farm, you walk that same field and see some pipes and valves protruding from the ground. Nearby there is a large rusting tank. There is no identification plate on the pipes or the tank. Who owns this equipment? Are they still operating the well? What if the tank is leaking? Can I remove this eyesore? Hoping to get some answers, you call the Pennsylvania Department of Environmental Protection. Remarkably, they inform you that they have no record of any oil and gas well ever being drilled on the family farm.

You talk to your new neighbor and he shows you an old pump-jack and brine tank located in a field on his property. The well is overgrown and unkept. He tells you the well was owned by a small, independent operator but no one has been around for years. Your neighbor is concerned the operator has either forgotten about this old shallow well or simply went out of business. His phone calls are not being returned. The brine tank is leaking.

Both you and your neighbor are not alone. Many landowners are experiencing the same shock, confusion and concern over the thousands of idle wells that litter the Pennsylvania landscape. The number of wells is staggering. Since the first commercial well was drilled by Edwin Drake in Titusville, Pennsylvania in 1859, an estimated 300,000 oil and gas wells have been drilled in Pennsylvania. Prior to 1955, there was no law that required operators to register and report the location of each well. Once the oil and gas stopped flowing, the operators simply walked away, often leaving the unmarked well without ever plugging the well or removing the related equipment. The well location was then forgotten to history. As a result, there is no official repository identifying the location or owner of many wells drilled between 1860 and 1955. While the Pennsylvania Department of Environmental Protection (PA DEP) has identified approximately 8,200 abandoned wells, this is just a small fraction of the actual number. One PA DEP official recently commented that they are aware of perhaps two to four percent of the abandoned wells, leaving close to 200,000 unaccounted for.

Idle wells present a myriad of safety and environmental concerns. A recent study from the National Academy of Sciences noted that abandoned oil and gas wells in Western Pennsylvania were providing “a pathway for subsurface migration and emissions to the atmosphere of methane and other fluids.”

In 2011, investigators determined that a house explosion in McKean County was caused by methane leaking from an ancient gas well located 300 feet from the house – the well was drilled in 1881. And in 2012, an abandoned gas well drilled in the 1930’s was at the center of a dramatic methane gas leak that caused a thirty-foot geyser to violently discharge out of the ground in Tioga County. This is not just about aesthetics – these rusting relics can be dangerous.

Not all idle wells are the same in the eyes of the law. Liability for environmental discharges, as well as plugging costs, often depend on how that particular well is characterized. Landowners should have a basic understanding of these classifications in order to better appreciate the unique legal issues presented by an idle well.

Idle wells fall into three general categories.

1. A well that is not currently producing oil and gas but is authorized by the terms of the parties’ lease or by PA DEP to remain idle. These wells are often described as being “shut in” or “inactive”.
2. A well that is not producing, has not been granted “inactive” status and the identity of the well operator is known.
3. A well that is not producing, has not been granted “inactive” status and the well operator is unknown.

A brief review of each category is provided below.

Many producing wells are periodically taken out of service due to mechanical issues or market conditions. Based on the precise language set forth in the parties’ lease, an operator can simply “turn the valve” and essentially take the well out of production. These wells are “shut-in.” When a well is shut-in, an operator can nonetheless maintain the lease by tendering what is known as a shut-in royalty in lieu of an actual production royalty. This operates as a form of “constructive” production, thereby maintaining the lease even though the well is not currently producing hydrocarbons “in paying quantities.” Shut-in status is temporary and the well is often put back into production after several months. Environmental and safety issues that may arise during this time are typically governed by the parties’ oil/gas lease. Liability for such damages generally rest with the well operator and not the landowner. As such, shut-in wells do not present the same legal issues as other idle wells.

A sub-set of this category is the so-called “inactive” well. Pursuant to Section 3214(a) of the Oil and Gas Act (the Act), the PA DEP may grant an idle well “inactive” status if certain criteria are met. The operator must demonstrate that precautions have been taken to “stop the vertical flow of fluid or gas within the well bore” and that the well bore itself is “adequate to protect freshwater aquifers.” See, 58 Pa.C.S.A. §3214(a). Moreover, the operator must certify to the PA DEP that “the well is of future utility” and must provide a plan “for utilizing the well within a reasonable time.” See, 25 Pa. Code §78.102(4). The well can remain “inactive” for up to five years. Upon expiration of this term, the operator must either: i) return the well to active status, ii) request an extension of “inactive” status, or iii) plug and decommission the well. See, 58 Pa.C.S.A. §3214(d).

Inactive wells may or may not be considered shut-in. Many do not qualify for shut-in status because they were never completed (i.e., perforated or stimulated) and are unable to actually produce hydrocarbons “in paying quantities.” This raises a thorny legal issue. If the primary term of the lease expires and the only well on the leasehold is “inactive” but not technically shut-in, an argument could be made that the lease itself has expired. See, Heasley v. KSM Energy, 52 A.3d 341 (Pa. Super. 2012) (“[W]hen production ceased, the lease became an at-will tenancy subject to termination by the lessor at any time”); Hite v. Falcon Partners, 13 A.3d 942 (Pa. Super. 2011) (“…when the primary term ended and Falcon failed to commence production, the agreements expired”). As such, while “inactive” status may avoid the obligation to plug and decommission an idle well, it will generally not maintain a lease beyond expiration of the primary term.

The second category of idle wells invloves those wells that are not producing but have not been granted inactive status. Such wells are considered legally “abandoned” under Section 3203 of the Act if the non-production period is at least twelve months. If the well is deemed abandoned, the operator has a non-delegable duty under Section 3220(a) to plug the well. A well is plugged by setting mechanical or cement plugs in the wellbore at specific intervals to prevent fluid flow. The plugging usually takes one to three days but can cost in excess of $15,000 per well. The operator must give notice of its intention to plug the abandoned well by submitting OMG Form 0005 to the PA DEP. The plugging operations must commence within thirty days of submitting the notice to PA DEP. From the landowner’s perspective, if there is a well on your property that is not shut-in and has not produced hydrocarbons in over a year, you should contact the well operator and request that the well be formally “abandoned” under the Act and immediately plugged. Liability for environmental and safety costs arising out of the abandoned well’s condition will generally be governed by the parties’ oil/gas lease and will therefore be the responsibility of the well operator.

The third category of idle wells is the most problematic and troublesome. Like abandoned wells, these wells are no longer producing and have not been granted inactive status. However, there is no registered owner or operator of the well. There is also no operative or active oil/gas lease in effect. These wells are known as “orphan wells” under Section 3203. It is important to note that if you discover such a well on your property, you have a statutory duty to inform PA DEP of the well location. See, 58 Pa.C.S.A. §3213(a.1). There is no fee or cost associated with this notice. The PA DEP will then formally classify the idle well as an “orphan well”. This classification can be critical when it comes to apportioning plugging costs and liability.

The PA DEP has the authority to plug abandoned and orphaned wells. Due to limited resources and lack of adequate funding, the PA DEP only plugs a small number of abandoned or orphaned wells each year. These plugging costs can be recovered from the owner or operator of the well. In the case of orphan wells, the owner or operator is usually unknown or out-of-business. Can the landowner be responsible for such plugging costs? Fortunately, the answer is no. As long as the idle well is classified as an orphan well and the landowner had no control over prior drilling operations, the landowner cannot be back-charged for plugging costs. See, 58 Pa.C.S.A. §3220(f). It must be noted, however, that the landowner immunity set forth in Section 3220(f) may not extend to other environmental costs or claims.

Of particular concern to the landowners is a phrase buried in Section 691.316 of the Clean Streams Law. Pursuant to this section, the PA DEP can order a “landowner” to correct a condition on the land which is polluting the waters of the Commonwealth. The term “landowner” is defined as “any person holding title to or having a proprietary interest in the surface or subsurface rights.” See, 35 P.S. § 691.316. Pennsylvania courts have interpreted this section broadly and have noted that cleanup liability can be imposed even if the landowner was not at fault in causing the pollution. See, Adams Sanitation Company v. Pennsylvania Department of Environmental Protection, 715 A.2d 390 (Pa. 1998) (“…the DEP can lawfully require an owner or occupier of land to correct a condition which exists on the land…regardless of whether that party caused or knew of the existence of the pollution”). See also, Western Pa. Water Co. v. Pennsylvania Department of Environmental Protection, 560 A.2d 904 (Pa. Commw. 1989) (“…fault is not a prerequisite to establishing liability under Section 316 of the Clean Streams Law”). To the extent an orphan well and brine tank are discharging “pollution” into a nearby stream or wetlands, a landowner could theoretically be liable for the cleanup costs under Section 691.316.

Likewise, a landowner should be aware of potential cleanup liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). CERCLA impose environmental liability from a broad range of “responsible parties” including the owner of a “facility”. The term “facility” is defined as “any site or area where a hazardous substance has…come to be located.” See, 42 U.S.C. §9601(9)(B). This clause could be interpreted to include an abandoned well pad site and adjacent equipment. Although CERCLA contains a well-publicized exemption for oil and gas drilling operations, this exemption does not apply to any waste materials or by-products that were “mixed” with the petroleum and thereafter were allowed to contaminate the land. See, United States v. Gurley, 43 F.3d 1188 (8th Circuit 1994) (holding that waste products associated with drilling were not subject to the CERCLA petroleum exemption). In the case of a leaking or contaminated orphan well, there is a potential liability risk under CERCLA. As such, any landowner purchasing property with abandoned or orphaned wells must seek appropriate protection and indemnification from the seller.

Abandoned and orphan wells pose significant environmental and safety risks. Landowners should take appropriate measures to minimize this risk by contacting the PA DEP when and if such wells are discovered on their property. Likewise, when negotiating an oil and gas lease or an agreement of sale, make sure the document addresses the responsibility to plug abandoned wells and also provides indemnification for any environmental-related costs and claims.