2011 saw steady increases of production throughout the Marcellus Shale play, a heavy emphasis on strengthening and expanding pipeline infrastructure, and a boom in the level of activity in the Utica Shale play. Although the overall national economy continued to sputter in 2011, the increased level of activity in the Marcellus and Utica Shale plays throughout Pennsylvania, West Virginia and Ohio proved to any remaining doubters that the energy companies working in these areas, along with the multitude of businesses that service the industry, will be permanent fixtures in our region for years to come.

2012 should see continued growth and maturation of drilling programs throughout the Marcellus play and the start of concerted drilling efforts in the Utica play. The next few weeks should bring the much anticipated announcement regarding Shell's location of its ethane cracker, with West Virginia and Pennsylvania seen as the leading contenders. With the passage of the West Virginia Horizontal Well Drilling Act in December of 2011, most expect a relatively quiet legislative session in West Virginia with respect to oil and gas issues. On the legislative side in Pennsylvania, 2012 looks to be another busy year, with Governor Corbett indicating that he will sign into law the drilling emergency response bill aimed at providing first responders with GPS coordinates of wells and emergency response plans for each drill site, and negotiations are ongoing among both chambers of the legislature and the Governor on a broader bill addressing an extraction fee and the extent to which local ordinances that attempt to limit drilling will be preempted. This legislation will certainly impact ongoing litigation before local zoning boards and courts regarding the lengths to which local governments may attempt to regulate development of Marcellus shale rights.

Below is our compilation of some of the most important stories in the oil and gas industry in our region for 2011. Many of the stories featured here will continue to be issues that demand our attention in 2012 and beyond.

1. Utica Shale Development

While numerous operators continued to grow their operations in the Marcellus Shale, a handful made significant investments and greatly increased their operations in the Utica Shale in Ohio and Pennsylvania. Chesapeake Energy is currently the most active operator in the Utica Shale play, holding leases on 1.5 million acres of Utica Shale in Ohio, with other operators active in the Utica Shale including ExxonMobil, Hess, Anadarko, Consol and Devon Energy.

The Utica Shale is thicker than the Marcellus, more geographically extensive and has already proven its ability to support commercial production. According to some estimates, the Utica Shale may hold as much as 25 billion barrels of crude. Chesapeake Energy announced that it has production reports from new test wells, along with thousands of older well logs and hundreds of feet of core samples, that point to one of the richest finds of oil ever made on American soil. Conservative estimates put the amount of oil in Ohio’s Utica Shale play at over 8 billion barrels. According to one industry analyst, more than 25,000 wells will ultimately be drilled. Lease prices, or the amount that oil companies are paying landowners for the right to explore for periods of 3 to 5 years, have risen as high as $4,000 per acre in Ohio and are still climbing. Click here to read more about Utica Shale development.

2. Increased Production in 2011

Although numbers for all of 2011 are not yet available, the number of Marcellus Shale wells drilled in Pennsylvania in 2011 through November had already greatly exceeded the number of Marcellus Shale wells drilled in Pennsylvania in all of 2010. According to figures from the Pennsylvania Department of Environmental Protection Bureau of Oil and Gas Well Management, in 2010 1,386 Marcellus Shale wells were drilled in Pennsylvania. In 2011, through November, 1,751 Marcellus Shale wells were drilled in Pennsylvania. Although the official number of Marcellus wells drilled in West Virginia in 2011 will not be available for several months, all indications point to the number of Marcellus wells drilled in West Virginia in 2011 far exceeding the number that were drilled in 2010.

This increased production in the Marcellus Shale, along with the increased production from other shale gas plays throughout the United States, has turned the concept of “energy independence” for the United States from a pipe dream and empty campaign slogan into a realizable goal. See this MarketWatch article for more information.

3. Infrastructure Advances — Midstream

Getting the new natural gas production from the Marcellus Shale to market and to end users became an industry focus in 2011. Although conventional production of natural gas has been active in Pennsylvania and West Virginia for more than a century, the limited pipeline system in place to support that production could not handle the influx of new Marcellus gas and required significant investment in the region in both gathering and distribution pipelines.

Indeed, many of the largest deals in the industry in 2011 involved midstream companies, as efforts to expand and strengthen the pipeline system supporting the production in the Marcellus and Utica Shales took center stage. By far the biggest deal of the year was Kinder Morgan’s announced plan to buy El Paso Corp., which owns and operates the largest national gas pipeline network in the United States, as part of a $21 billon deal. Also in the midstream market, MarkWest Energy, the Appalachian region's largest natural gas compressor firm, announced that it acquired the remaining 49 percent of its Marcellus Shale joint venture with the Energy and Minerals Group for approximately $1.8 billion. The two companies also announced a new joint venture centered in eastern Ohio to target the Utica Shale formation.

4. Efforts by Local Cities/Municipalities to Ban/Limit Drilling

A recurring topic of this newsletter throughout 2011 was the efforts by local governments in Pennsylvania and West Virginia to limit or ban drilling or hydraulic fracturing within their borders and the industry’s response to these efforts. Spilman represented and advised several exploration and production companies in response to such efforts in both Pennsylvania and West Virginia. The firm secured an important victory for the industry when, in August of 2011, the Circuit Court of Monongalia County, West Virginia struck down the City of Morgantown’s ordinance banning horizontal drilling and hydraulic fracturing within the city limits of Morgantown and one mile beyond the city limits in all directions.

5. Billion Dollar Deals Are the New Norm in the Industry

The year 2011, like the years since the inception of the Marcellus Shale play, saw significant acquisitions and unique joint ventures formed, demonstrating the extensive capital needed to develop natural gas production. 2011 kicked off with the closing on Chevron’s $4.5 billion acquisition of Atlas Energy and ended with Chevron’s announcement of a 2012 capital spending program of nearly $9 billion, including major investments in Pennsylvania. Some other noteworthy deals of 2011 included the following:

• Consol Energy entered into a joint development plan with Noble Energy Inc. for half of its Marcellus acreage and wells. Under the agreement, Noble Energy will make aggregate payments to Consol of about $3.3 billion. This is in addition to Consol’s joint venture with Hess Energy to explore Utica Shale acreage worth $594 million and its sale of royalty interests in Marcellus Shale acreage to Antero Energy for $193 million in September.
• Chesapeake Energy formed a joint venture with Statoil.
• Further expanding their involvement since acquiring XTO, ExxonMobil paid $1.69 billion for 317,000 acres owned by Phillips Resources and TWP Inc.
• EQT Corp. announced an IPO for its newly formed MLP midstream operations as well as a $1.6 billion capital budget for 2012 with the hope of drilling more than 130 Marcellus Shale wells.
• Gastar Exploration announced plans to invest approximately $200 million in West Virginia's Marcellus Shale field in 2012, with virtually all of the money directed to Marshall County, West Virginia.

6. New Laws Regulating/Affecting the Industry

As the discussion in the December newsletter detailing the West Virginia Horizontal Well Act, passed and effective on December 13, 2011, showed, new and proposed legislation in Pennsylvania and West Virginia attempting to regulate the natural gas industry in these states was a key development in the industry in 2011. Indeed, the final days of 2011 saw the passage of legislation in Pennsylvania allowing the Pennsylvania Public Utility Commission to enforce regulations regarding pipelines within the state. A full discussion of this legislation is included in this month’s newsletter.

While West Virginia passed and the governor signed the Horizontal Well Act in late 2011, each of Pennsylvania’s legislative chambers passed a version of a Marcellus Shale bill (Senate Bill 1100 and House Bill 1950), but the two chambers and the Governor’s Office continue to negotiate regarding the final language. Based loosely on the recommendations from the Governor’s Marcellus Shale Advisory Commission, the issues still under debate in the Pennsylvania legislation include the extent of an extraction impact fee and the extent to which state regulations will preempt local ordinances. While unpopular with some local officials and state legislators, both Senate Bill 1100 and House Bill 1950 provide for the preemption of local zoning ordinances, so, at present, it would require a reversal for that provision not to be part of the final legislation.

7. Economic Impact of the Industry in the Region

The economic impact of oil and gas production in the Marcellus and Utica Shale plays continued to exceed even the most optimistic projections. As of December 2011, in southwestern Pennsylvania alone,

• 16 percent of the region’s economy comes from energy;
• 750 energy-related companies have operations here;
• 150,000 jobs or more are supported, directly or indirectly, by those companies; and
• $19 billion in gross regional product is generated from energy.

This is an update on data compiled by the Pennsylvania Economy League of Southwestern PA in 2008 and represents a net increase of

• 50 companies,
• 45,000 jobs, and
• $5.3 billion in economic activity.

Numerous companies throughout the region are touting the low cost of natural gas and how to incorporate natural gas into their operations. Such companies include US Steel, Bayer Corp., LANXESS and FedEx.

An interesting highlight also came from Washington County, Pennsylvania: according to the United States Department of Labor's Bureau of Labor Statistics, Washington County had the third highest percentage increase of employment in the entire country. The bureau determined that between March 2010 and March 2011, Washington County's employment growth was 4.3 percent. Only two other counties in the U.S. — Elkhart County in Indiana and Ottawa County in Michigan — had higher employment growth rates. This is a significant finding and is directly related to the positive economic impact of the Marcellus Shale industry.

An updated Pennsylvania State University economic study of the Marcellus Shale gas boom is even more bullish than past reports, projecting that Pennsylvania could supply a quarter of the nation's natural gas by 2020. The researchers estimate that Marcellus production drove down natural gas prices by 12.6 percent last year, saving Pennsylvania residences and industries $633 million in energy costs.