Message from DEP Secretary Chris Abruzzo

Message from DEP Secretary Chris Abruzzo It is hard to imagine that less than five years ago, most Pennsylvanians were unfamiliar with terms such as Marcellus Shale and hydraulic fracturing. Today, most of us are not only familiar with these terms, but many have witnessed the steady transformation of this state into the second largest natural gas producing state in the nation. We are in the midst of an energy revolution that is bringing new jobs to Pennsylvania, spawning new economic development and growth, and providing energy security to our nation. At DEP, we are at the forefront of this revolution, charged with ensuring that this vast energy resource is produced in an environmentally responsible manner. Since joining the Pennsylvania Department of Environmental Protection (DEP) in April 2013, I have met with staff from across the agency to review our programs and identify ways in which we can perform our mission better. I am pleased to work alongside so many dedicated public servants who care about our environment and utilize their problem solving skills to protect our environment and facilitate responsible development across Pennsylvania. We are one DEP. as such, it is our collective mission to protect Pennsylvania s air, land and water from pollution and to provide for the health and safety of our citizens. We are to guarantee that all Pennsylvanians, including future generations, have a safe, healthy environment. We are to work as partners with individuals, organizations, governments and businesses to achieve a balance in preventing pollution and restoring our natural resources, while carrying out these responsibilities in a fair and timely manner that respects both the environment and the regulated community, and is deserving of the public s trust. I hope you find this 2013 Oil and Gas Annual Report to be informative and insightful about DEP s Oil and Gas Program and how we are fulfilling our mission. This report provides information about how we authorize and inspect oil and gas exploration and production operations in the commonwealth. You will also learn about innovative approaches that have been implemented by DEP and get a glimpse of what to expect during 2014. Calendar year 2013 was a productive one and DEP continues to build on our past accomplishments to achieve even greater successes during 2014! Enjoy, E. Christopher Abruzzo Secretary

Table of Contents: Pennsylvania s Energy Landscape... 2 Advancing Our Energy Security... 3 DEP s Mission... 4 DEP s Structure... 5 DEP s Oil and Gas Program - A World Class Leader... 6 Pennsylvania s Shale Plays... 7 Permitting... 8 Inspections... 19 Compliance and Enforcement... 20 Stray Gas Investigations... 21 Regulatory and Policy Development... 24 Innovations... 27 What s new for 2014?... 28 A Culture of Continuous Improvement... 31 Disclaimer: The information contained in this report is based on the data contained in DEP information systems at the time of the publication of this report, including, but not limited to, the department s enterprise-wide permitting and compliance database called efacts (Environment Facility Application Compliance Tracking System). As some data contained in these systems are self-reported by operators and other permitees, data in this report reflects the data as reported to the department. 1 P a g e

PENNSYLVANIA S ENERGY LANDSCAPE: The exploration and production of energy sources is not new to Pennsylvania. In fact, the first commercial oil well was successfully drilled in 1859 by Edwin Drake in Titusville, Pennsylvania. This was the birth of what was to become the nation s petroleum industry. During the late 1800s, Pennsylvania was the nation s leading producer of crude oil with production levels peaking in 1891 at approximately 31 million barrels; about 58 percent of the nation s total oil capacity. By the early 1900s, major oil fields were discovered in Texas, Oklahoma and California that shifted exploration and production activities to the mid-west and western portions of the country. Pennsylvania s crude oil production quickly waned as exploration and production of new oil fields opened up in other parts of the country. As conventional oil reserves in Pennsylvania became less productive, new techniques and practices were used to flood unproductive wells with surface water to push oil to the surface. Although the productivity of oil wells in Pennsylvania continued to decline throughout the remainder of the 20 th century, conventional oil reservoirs in the state continued to yield a sufficient volume of oil to support a viable oil industry. During 2013, almost 5 million barrels of crude oil were produced in Pennsylvania. In addition to historic oil reserves, Pennsylvania has also been a source of natural gas for well over a century. Although natural gas was routinely encountered by early oil developers, it was initially considered to be more of a nuisance than a resource. As methods improved for capturing, transporting and using natural gas, a modern natural gas industry began to emerge. It was long suspected that deposits of natural gas existed within vast tight shale formations deep under Pennsylvania s surface; however, conventional extraction methods were not able to effectively unlock the natural gas from its source and the actual quantities were not well understood. Today, these black shale deposits are called shale plays and are referred to by their geological naming conventions such as the Marcellus Shale play and the Utica Shale play. The term unconventional refers to these same shale formations that utilize horizontal drilling methods and hydraulic fracturing techniques to break up the shale rock to allow the natural gas that is trapped within the target formation to flow more freely to the well bore. It was not until recently that effective drilling and hydraulic fracturing techniques could be successfully and economically deployed to capture natural gas from these shale deposits. In 2004, the first unconventional natural gas well was developed in Pennsylvania and positive results led to additional unconventional wells being constructed. Within several years, a renaissance in natural gas production emerged in Pennsylvania making it a dominant supplier of natural gas to the nation. The successful production of unconventional resources such as the 2 P a g e

Marcellus and Utica shale plays are transforming not just the United States, but indeed the world. In Pennsylvania, natural gas operators are reporting increased production rates that are expected to rise over the coming years. In 2013, Pennsylvania produced over 3 trillion cubic feet of natural gas. 1,800,000,000 Unconventional Shale Well Gas Production (MCF) 2011-2013 1,600,000,000 1,400,000,000 1,200,000,000 1,000,000,000 800,000,000 600,000,000 400,000,000 200,000,000 0 Jan-Jun 2011 Jul-Dec 2011 Jan-Jun-2012 Jul-Dec-2012 Jan-Jun-2013 Jul-Dec 2013 ADVANCING OUR ENERGY SECURITY: Today, much of the nation s oil production occurs in states such as Texas, North Dakota, Oklahoma, California and Alaska; however, Pennsylvania s conventional oil patch in the northwest corner of the state continues to yield crude oil. Since this crude oil is paraffin-based, it is renowned for its lubricating qualities and is used in the manufacture of petroleum lubricants such as motor oils and as an ingredient in consumer products such as cosmetics, ointments and lotions. Pennsylvania s oil producers typically use conventional drilling methods that have not changed much over the past century to capture this resource. Since 2008, Pennsylvania s natural gas production has increased exponentially as a result of unconventional drilling techniques including hydraulic fracturing and horizontal drilling. This increasing trend in shale gas production is resulting in energy security that translates to national security in the form of less dependence on fossil fuels from other parts of the world. Increased shale gas production has resulted in a number of significant benefits including less expensive energy costs and improvements to Pennsylvania s air quality as a result of the increased use of cleaner burning natural gas. 3 P a g e

Pennsylvania s legislature passed several significant amendments to the state s oil and gas laws with Act 13 of 2012. This law, for the first time, included an impact fee that is paid for by the natural gas industry to offset the costs of the impacts to local communities and counties where natural gas drilling occurs. During the past three years, more than $630 million has been collected by the commonwealth and these monies have largely been allocated to Pennsylvania s counties and municipalities, in addition to providing funds to support state agencies and organizations that oversee natural gas drilling activities in Pennsylvania. DEP receives $6 million annually in new revenue from the impact fee. Pennsylvania s natural gas reserves are significant compared to other shale gas plays across the country; however, it is not a limitless resource nor is it the only energy resource on which this nation relies. Currently, there is no single energy source that can solely meet the energy demands of the United States, let alone the entire world. Although the production of oil and natural gas provides tangible benefits, it must be done in a way that is protective of Pennsylvania s citizens and the environment. DEP s MISSION: The mission of the Department of Environmental Protection (DEP) is to protect Pennsylvania's air, land and water from pollution and to provide for the health and safety of its citizens through a cleaner environment. We will work as partners with individuals, organizations, governments and businesses to prevent pollution and restore our natural resources. DEP plays a vital role in the comprehensive oversight and regulation of the oil and gas industry in Pennsylvania. Although there are some related federal statutes that affect the oil and gas industry, most laws and regulations that pertain to the oversight and regulation of the oil and gas industry in Pennsylvania reside at the state level. In Pennsylvania, DEP is the primary agency that is responsible for issuing permits that are required prior to the construction and operation of oil and gas wells; and DEP is the primary agency responsible for inspections at well sites. There are other agencies and organizations in Pennsylvania that are responsible for various other roles including the Pennsylvania Public Utility Commission (PUC), the Department of Conservation and Natural Resources and regional river basin commissions to name a few. However, DEP is the primary state agency that is responsible for regulating the construction of well sites and conducting regular inspections to ensure that well sites are operated in a manner that is safe for Pennsylvania s citizens and protective of the environment. PUC and the Federal Energy Regulatory Commission (FERC) also play an important role in terms of inspections of natural gas transmission pipelines in Pennsylvania. Although DEP is responsible for inspections of the construction of natural gas gathering lines, PUC is responsible for safety inspections of intrastate natural gas transmission lines that carry natural 4 P a g e

gas to local markets, and FERC is responsible for inspections of interstate natural gas transmission lines that move natural gas to regional and national markets. DEP s STRUCTURE: The Office of Oil and Gas Management was established as a result of the departmental reorganization in 2011 and, for the first time, the Bureau of Oil and Gas Management was elevated to a deputate-level program. The current organization chart for the Office of Oil and Gas Management is depicted to the right. DEP s Office of Oil and Gas Management employs 202 individuals of which approximately 80 percent of are assigned to engineering, scientific or permit/inspection-related work and the remaining 20 percent provide administrative, legal and clerical support. The office consists of two overarching bureaus. The Bureau of Oil and Gas Planning and Program Management is located in central office (Harrisburg) and is responsible for the administrative, policy and regulatory development functions. The Bureau of District Oil and Gas Operations consists of three district oil and gas offices and is responsible for all permitting, inspection, compliance and enforcement functions. The Bureau of Oil and Gas Planning and Program Management includes the following three divisions: Well Development and Surface Activities This division is responsible for developing policies and guidance related to surface activities associated with oil and gas well site design and construction. This includes engineered well pad components such as erosion and sediment control structures, pits and impoundments. Staff in this division advise district permitting and inspection staff to ensure that best management practices and controls are implemented on wells sites to reduce and minimize surface erosion from entering the state s waterways. Well Plugging and Sub-Surface Activities This division consists of the Subsurface Activities Section and the Well Plugging Section. The Subsurface Activities Section is responsible for the management of subsurface oil and gas related program services and activities and offers expertise in the subjects of drilling, casing, cementing, completion, stimulation, workover, and production activities and operations associated with conventional and unconventional 5 P a g e

hydrocarbon formations in Pennsylvania. The Well Plugging Section maintains and implements the successful Orphan and Abandoned Well Plugging Program. Compliance and Data Management This division works closely with DEP s Bureau of Information Technology to oversee the operation and maintenance of data management systems and databases that track production data that is submitted by the regulated community. This division also runs weekly workload analysis reports, develops interactive reporting tools, prepares statistical and graphical analyses, and maintains the oil and gas website. The Bureau of District Oil and Gas Operations includes three district offices that implement the operational programs in the Eastern, Northwest, and Southwest areas of the Commonwealth. Staff in the district offices conduct the functions of permitting, inspections, compliance and enforcement and are based in Williamsport, Meadville and Pittsburgh. Several small field offices are located in each of the district geographic areas to enable DEP to more effectively implement its inspection and compliance programs and oversight of the regulated community. DEP s OIL AND GAS PROGRAM - A WORLD CLASS LEADER: Pennsylvania is recognized nationally and internationally as having successfully developed a regulatory approach that both protects its environment and citizens while also providing for optimal development of oil and gas resources. Over the past several years, representatives and officials from many countries around the world have traveled to Pennsylvania to meet with DEP s Office of Oil and Gas Management to learn more about its programs and practices. 6 P a g e

Closer to home, DEP s regulatory approach has served as a model to other state environmental agencies as well. In May 2013, the State Review of Oil and Natural Gas Environmental Regulations, Inc. (STRONGER) conducted a programmatic and regulatory review of DEP s Oil and Gas program. STRONGER is a non-profit, multi-stakeholder organization whose purpose is to assist states in documenting the environmental regulations associated with the exploration, development and production of crude oil and natural gas. The organization shares innovative techniques and environmental protection strategies and identifies opportunities for program improvement. The state review process is a non-regulatory program and relies on states to volunteer for reviews. On Sept. 20, 2013, STRONGER published the results of its most recent independent peer review of DEP s oil and gas regulatory program at www.strongerinc.org and found it to be proficient and ready to address the increase in oil and gas operations in Pennsylvania. This represents the fifth review of Pennsylvania's oil and gas program since 1990. STRONGER recognized the following actions taken by Pennsylvania s Oil and Gas program to strengthen the following key areas: Increased staff levels to address additional permitting, inspection and enforcement activities related to increased unconventional gas well development; Expanded the program s public participation activities associated with the abandoned well sites program; Initiated a comprehensive evaluation of radiation levels specifically associated with unconventional gas development, the first of its kind in the nation; Mandated that operators performing earth disturbance activities associated with oil and gas activities develop and implement erosion and sedimentation control best management practices to minimize the potential for erosion and sedimentation; and Advanced its hydraulic fracturing program and required that well operators conducting well casing and cementing to maintain control and prevent migration of gas or other fluids into sources of fresh groundwater. PENNSYLVANIA S SHALE PLAYS: Unconventional shale basins are commonly characterized according to the geologic formation that serves as the source of its shale gas. The term shale play is used by the oil and gas exploration and development industry to identify areas of shale basins that appear to be particularly suitable for shale gas development. The current predominant shale play in Pennsylvania is the Marcellus Shale Play; however, interest is beginning to increase in the exploration and production of the Utica Shale Play that lies well below the Marcellus Shale Play. There are other less familiar shale plays in and around Pennsylvania including the 7 P a g e

Rhinestreet, Huron and a collection of less extensive formations that comprise the Upper Devonian shale formation. The type of gas found in most areas of the Marcellus Shale Play throughout Pennsylvania is geologically mature and consists of mostly methane that requires little processing prior to use. This gas is commonly called dry gas. Marcellus shale gas found along the westernmost border of Pennsylvania is less geologically mature; therefore, in addition to methane, the gas contains additional hydrocarbons such as ethane, propane and butane. This gas is commonly called wet gas and can be used to produce plastics and other high value petroleum-based products. Given the current spot market price of petroleum feedstocks, the value of wet gas is significantly more valuable than dry gas. Although the Marcellus Shale Play overlies the Utica Shale Play, both stretch from the eastern portions of Ohio and West Virginia through the southwest to northeast corners of Pennsylvania and terminate in southern New York State. Map depicting Unconventional Shale Plays in the Northeast PERMITTING: The Office of Oil and Gas Management is responsible for the review of all permit authorizations related to the construction of oil and gas wells and development of the sites on which they are 8 P a g e

constructed. Although there are many types of permit authorizations that are issued by permitting staff within the Office of Oil and Gas Management, the two permits that are most commonly issued by DEP include the Erosion and Sediment Control General Permit 2 and the Drill and Operate a Well permit (commonly called the Well Drilling Permit). Although not technically a permit, the Office of Oil and Gas Management also operates a well plugging program that requires entities that intend to plug an orphaned or abandoned well to submit formal notification to DEP. Due to its significance, a summary of DEP s well plugging program is included in this section along with a description of the Erosion and Sediment Control General Permit 2 and the Drill and Operate a Well permitting programs. Erosion and Sediment Control General Permit-2 (ESCGP-2) The Erosion and Sediment Control General Permit-2 (ESCGP-2) is designed to address earth disturbances at oil and gas sites where more than 5 acres of land are disturbed. This general permit is typically used to authorize an operator to construct unconventional gas well pads and associated pipelines, retention basins, pits and impoundments. On Dec. 29, 2012, the department published as final, the ESCGP-2 and revisions to the Policy for Erosion and Sediment Control and Stormwater Management for Earth Disturbance Associated with Oil and Gas Exploration, Production, Processing, or Treatment Operations or Transmission Facilities (hereafter, stormwater policy). The ESCGP-2 permit and associated stormwater policy were developed concurrently and incorporated significant stakeholder input that was received during 2012. The ESCGP-2 permit was developed to replace Erosion and Sediment Control General Permit 1 (ESCGP-1) that expired on April 12, 2013. The revisions to the stormwater policy were the first since July 2003 and were intended to address the type and scope of oil and gas activities currently occurring in Pennsylvania. Industry training related to the new permit and stormwater policy was held throughout 2013. The standard permit review timeframe for an ESCGP-2 permit is 43 business days. DEP offers an expedited review process whereby a permit decision can be reached in 14 business days provided the project achieves the permit standards and ensures protection of the environment. In certain situations, such as when a well site is in close proximity to high quality or exceptional value waters, the expedited review process is not available to the permit applicant. In 2013, DEP issued 287 ESCGP-1 permits and 460 ESCGP-2 permits. Since 2013 was the first year that the ESCGP-2 permit was created and in use, the department will evaluate the longterm permit trends as more information becomes available. Drill and Operate a Well Permit As the name implies, the Drill and Operate a Well Permit (aka, well drilling permit) authorizes an operator to construct and operate a conventional or unconventional well. An unconventional well site and well pad is typically constructed to accommodate multiple wells. 9 P a g e

An operator is responsible to obtain an individual permit for each well that is constructed. A Drill and Operate a Well Permit must be submitted to DEP for each additional well that is intended to be drilled on the well pad or when an existing well is drilled deeper into a geologic formation. The Oil and Gas Act requires DEP to render a permit decision within 45 calendar days of receiving a complete application. Distribution of Well Drilling Permits issued in Pennsylvania In 2013, DEP issued a total of 4,617 well drilling permits to include both conventional and unconventional wells in Pennsylvania. Of this amount, DEP issued 2,965 well drilling permits for the construction of unconventional wells and 1,652 well drilling permits for the construction of conventional wells. The graph below shows the total number of conventional and unconventional well drilling permits issued by DEP since 2008. As evidenced in this graph, the number of well drilling permits issued by DEP has been trending downward since 2008. This downward trend is likely a result of the industry s reaction to the declining market price of natural gas during this same timeframe as well as more efficient planning of well site locations by operators. As the market price of natural gas began to rebound during 2013, there was a slight increase in the number of permits received and issued by DEP as evidenced in the graph below. Conventional and Unconventional Well Permits Issued (by year) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Conventional Permits Issued Unconventional Permits Issued 0 2008 2009 2010 2011 2012 2013 Unconventional Well Drilling Permits The geographic region of the state where operators have obtained well drilling permits to construct unconventional wells generally correlates to the locations of the unconventional 10 P a g e

shale plays. That being the case, not all locations within the unconventional shale plays are equal in terms of the volume of available gas or the productivity of the wells that are constructed. The map below identifies the distribution, by county, of the 2,965 well drilling permits issued in calendar year 2013 for the purpose of constructing unconventional gas wells. Map depicting distribution of permits issued for unconventional wells (2013) During 2013, the top ten counties with the highest number of unconventional permits issued by DEP include: County Number of Unconventional Permits Issued Susquehanna 557 Bradford 455 Washington 414 Lycoming 325 Greene 259 Butler 160 Wyoming 136 Tioga 88 Armstrong 62 Sullivan 58 11 P a g e

Conventional Well Drilling Permits The map below identifies the distribution, by county, of the 1,652 well drilling permits issued in calendar year 2013 for the purpose of constructing conventional oil and gas wells. As evidenced in the map, the majority of all well drilling permits for conventional well sites were issued to operators in McKean, Warren and Venango counties since this area represents the area commonly called the oil patch region of the state where Pennsylvania Grade crude oil is most prevalent. Map depicting distribution of permits issued for conventional wells (2013) During 2013, the top ten counties with the highest number of conventional permits issued by DEP include: County Number of Conventional Permits Issued McKean 445 Warren 427 Venango 310 Forest 276 Lycoming 32 Elk 29 Clarion 24 Butler 15 Crawford 15 Armstrong 13 12 P a g e

Distribution of Wells Drilled in PA In 2013, operators drilled a total of 2,174 wells in Pennsylvania, including both conventional and unconventional wells. Of this amount, 1,207 are unconventional wells and 967 are conventional wells. The actual numbers of unconventional and conventional wells that are drilled in Pennsylvania vary from the numbers of well drilling permits that are issued by DEP. One reason for this is that a well drilling permit is valid for a full year and can be extended if requested and approved by DEP. An operator may commence drilling at any time during the period that the permit is in effect. Depending on individual business practices, oil and gas operators may secure a well drilling permit far in advance of commencing actual drilling operations. In some cases, an operator may also determine that a site is not suitable for drilling. Due to these reasons, it is common that the number of permits issued by DEP exceeds the number of wells drilled in any given year. Unconventional Wells Drilled The following map identifies the distribution, by county, of the 1,207 unconventional wells that were drilled in calendar year 2013. Map depicting distribution of wells drilled for unconventional wells (2013) 13 P a g e

During 2013, the top 10 counties with the highest number of unconventional wells drilled in Pennsylvania include: Conventional Wells Drilled County Number of Unconventional Wells Drilled Washington 220 Susquehanna 207 Lycoming 166 Greene 117 Bradford 109 Butler 92 Wyoming 67 Armstrong 34 Tioga 30 Westmoreland 28 The following map identifies the distribution, by county, of the 967 conventional wells that were drilled in calendar year 2013. Of all conventional wells drilled in Pennsylvania in 2013, more than 86 percent were drilled in only four northwestern counties located in the oil patch region of the state. Map depicting distribution of wells drilled in PA for conventional wells (2013) 14 P a g e

During 2013, the top 10 counties with the highest number of conventional wells drilled in Pennsylvania include: Well Plugging Program County Number of Conventional Wells Drilled Warren 304 McKean 198 Forest 168 Venango 164 Elk 61 Crawford 13 Indiana 10 Clarion 10 Greene 9 Armstrong 6 It is estimated that more than 350,000 wells have been drilled in Pennsylvania, since the drilling of oil and gas wells began over a century ago. Some wells that are drilled produce oil and gas for many years while other wells are found to be dry and do not produce enough oil or gas to be profitable. All wells that are drilled must be properly plugged or sealed to ensure that communication between deeper brines and hydrocarbons and fresh groundwater sources does not occur. Although stringent requirements currently exist regarding the proper methods to plug wells, this was not always the case. In fact, it was not until the passage of the Oil and Gas Act of 1984 that laws and regulations were created to ensure the safe plugging of orphaned and abandoned wells. Prior to the passage of modern oil and gas laws, wells were sometimes plugged using crude techniques such as driving a wood log into a well; while, in other cases, wells were simply abandoned and never plugged. Abandoned well locations sometimes exist in unlikely places such as residential communities, rural and farm communities, cemeteries, parking lots, under buildings and in rare cases even in streams. Today, stringent oil and gas laws and regulations have been promulgated and require wells to be properly plugged when they are no longer able to serve their intended purpose. Also, operators are now required to post bonds with DEP to ensure that wells are properly plugged at the end of their useful life. DEP tracks all known orphaned and abandoned wells; however, many thousands of wells continue to exist and their exact locations may not be known. Currently, there are over 8,300 orphaned and abandoned wells that are known to exist and are on record with DEP; and many of them are located in the northwest and southwest regions of the state where much of the early oil and gas exploration and production occurred. To date, the Well Plugging Program has plugged a total of 2,948 wells. Typically, the Well Plugging Program issues between 10 and 14 new plugging contracts each year. The individual contracts vary in size and include between one to more than 100 wells. In 15 P a g e

2013, the Well Plugging Program issued 14 new well plugging contracts that resulted in the plugging of 38 individual wells located in the following counties: Washington, Allegheny, McKean, Venango, Potter, Jefferson, Elk, Erie and Armstrong. Of that total, 14 were oil wells, eight were gas wells and 16 were combined oil and gas wells. The general locations of the wells that were plugged in 2013 are displayed on the map below. Map depicting distribution of wells plugged in 2013 When a responsible owner is known to exist or is identified, they are legally responsible to plug a well when it is no longer capable of effectively producing oil or gas as intended or after it has been abandoned. In this case, the operator is required to submit a Notice of Intent by Well Operator to Plug Wells form to DEP prior to plugging the well. After well plugging is completed, a Certificate of Well Plugging form must be submitted to DEP by the operator. When orphaned and abandoned wells are discovered and no responsible owner exists, those wells are placed on the department s list of orphaned and abandoned wells. DEP inspects each newly-discovered orphaned and abandoned well and ranks and subsequently prioritizes all wells. Prioritization is based on health and safety criteria, environmental degradation and other potential impacts. Wells that present a high risk to human health and safety and the environment are plugged first. DEP inspectors routinely follow up to ensure that all wells are plugged in accordance with DEP s regulatory requirements. Funding for the Orphan and Abandoned Well Plugging Program is derived from surcharges established by Section 3271 of the 2012 Oil and Gas Act. Well plugging contracts are funded by permit surcharges that are collected separately from, and in addition to, the well drilling permit application fee. The orphan well surcharge is $100 for an oil well or $200 for a natural gas well. A separate additional abandoned well surcharge of $50 applies to both oil and gas wells. The Orphan Well Plugging Fund and the Abandoned Well Plugging Fund are dependent on the 16 P a g e

number of new drilling permits submitted to DEP by oil and gas operators. In addition to these fees, the Oil and Gas Act of 2012 allocated funding to the Commonwealth Financing Authority for the purpose of administering a program that includes the plugging of wells. Streamlining the Permitting Process e-well Permitting The e-well Permit is intended to streamline the oil and gas permitting process and convert DEP paper-based permits to a fully online system that will include an electronic application, electronic review and electronic permit issuance. DEP s Oil and Gas Program is the first permit program within DEP that has been migrated to an electronic permitting platform and will result in the elimination of paper-based permit applications, reducing processing and physical storage space requirements. This new tool will also increase efficiency, improve data integrity, and improve DEP s ability to more quickly locate records and provide timely responses to Right-to-Know requests. The e-well permit was developed in-house in partnership with DEP s Bureau of Information Technology. Oil and gas operators utilize a secure web interface where they can create and electronically submit a well permit application with supporting documentation and associated supplemental permits. DEP staff now has the ability to review and route permits more efficiently while seamlessly interacting with the department s enterprise-wide permitting and compliance database called efacts (Environment Facility Application Compliance Tracking System). A user/operator workgroup was identified in 2012 to provide input to DEP regarding early design concepts. DEP convened a user workgroup of select oil and gas operators to conduct beta testing in late August 2013. The user workgroup provided comments to DEP regarding the use of the proposed e-well application. Feedback from the user workgroup as well as ongoing internal testing assisted in the refinement of the e-well application. The e-well Permitting System went live Nov. 13, 2013 for the initial user workgroup to use and will be opened to all operators in 2014. Natural Gas Compression Facilities General Permit (GP-5 permit) On Feb. 2, 2013, DEP finalized revisions to a general plan approval and general operating permit for natural gas-fired engines, dehydrators, storage tanks and other equipment at natural gas compression and/or processing facilities (aka, GP-5 permit). Compressor stations help move gas from well sites into transmission pipelines. This revised general permit establishes requirements for best available technology, authorizes the construction, modification and operation of these natural gas facilities. These minor sources typically are not subject to major source permitting requirements including Title V and New Source Review of the federal Air 17 P a g e

Pollution Control Act. The new GP-5 permit was developed after considering public comment and includes significantly lower allowable emission limits than the previous general permit. The GP-5 permit imposes emission limitations that are 75 to 90 percent more stringent than previously permitted emission limits for natural gas-fired engines used at compressor stations. In addition to more stringent emission limitations, this general permit includes municipal notification, source testing, recordkeeping and reporting requirements. Operators of facilities authorized to use the GP-5 permit must demonstrate that their facilities continue to be minor sources as defined by the Clean Air Act which allows for operational flexibility. In addition to the air quality benefits, this general permit has streamlined the overall air quality permitting process. Air Quality Permit Exemption Criteria Modification Since 1996, oil and gas well sites in Pennsylvania had been granted blanket exemptions from obtaining air quality plan approvals and operating permits (i.e., Exemption Criteria Category 38 for Gas Well Sites). Given the recent expansion in natural gas exploration and production activities in Pennsylvania this blanket exemption has been modified and on Aug. 10, 2013, DEP finalized new exemption criteria. These criteria require actions to be taken that are more stringent than the EPA s standards for new emission sources and result in emission levels of minor significance. If an owner or operator is unwilling to or cannot meet these criteria, they must seek an air quality plan approval for construction of the well site from DEP. Permit Review Process and Permit Decision Guarantee On July 24, 2012, Gov. Tom Corbett issued Executive Order 2012-11 that required DEP to implement a Permit Decision Guarantee by immediately: Assessing how best to make timely permitting decisions; Providing clear expectations for applicants to improve the quality of applications; Establishing performance measures for review staff; and Developing, improving and encouraging electronic permitting tools. Executive Order 2012-11 also rescinded a 1995 Executive Order that established the original Money Back Guarantee for permits. Over the course of 18 months, DEP reviewed existing permitting procedures and developed a draft Permit Review Process and Permit Decision Guarantee policy that was published for public comment. The "Permit Review Process and Permit Decision Guarantee" policy, replaces the former Money Back Guarantee policy. A separate "Permit Coordination Policy" was also developed to direct how the department will review projects that require multiple permits from DEP. 18 P a g e

The department reported on Nov. 1, 2013 as part of its 4 th Quarterly Report that 95 percent of permits were issued within the guarantee timeframes according to the Permit Review Process and Permit Decision Guarantee. It was further reported that the Office of Oil and Gas Management increased its permitting efficiency by 13 percent when comparing the permitting efficiency under the prior Money-Back Guarantee policy. The Office of Oil and Gas Management remains committed to conducting permit reviews in a manner that is protective of our environment; while also conducting such reviews in a timely manner as directed by the Permit Review Process and Permit Decision Guarantee. INSPECTIONS: Another important responsibility of DEP s Office of Oil and Gas Management is to conduct rigorous inspections at oil and gas sites across the state. Inspections at well sites are necessary to ensure that permit requirements are achieved at the actual well sites. In response to enhanced oversight and in conjunction with the notification requirements contained in the 2012 Oil and Gas Act, the Office of Oil and Gas Management has significantly increased the number of inspections conducted at conventional and unconventional well sites. Likewise, DEP has increased the number of its inspectors since 2009 to its current level of more than 80 inspectors. As depicted in the bar chart on the following page, the total number of all well inspections has steadily increased from 2008 through 2012; and remained steady in 2013. In 2008, the Office of Oil and Gas Management conducted 1,262 inspections of 377 unconventional wells. By 2012, the number of inspections increased to 12,680 inspections of 4,859 unconventional wells. This reflects an order of magnitude increase in the number of inspections that were conducted during this five-year period. The inspection rates remained steady during 2013 with 12,391 inspections of 5,559 unconventional wells. In 2008, the Office of Oil and Gas Management conducted 10,058 inspections of 7,143 conventional wells. By 2012, the number of inspections increased to 11,762 inspections of 7,765 unconventional wells. The inspection rates remained steady during 2013 with 11,713 inspections of 7,808 conventional wells. While the number of inspections of conventional wells has increased over time since 2008, the significant increase in the number of inspections of unconventional wells, coupled with inspections of oil and gas well pad sites and administrative inspections, has resulted in a significant increasing trend of total oil and gas inspections over the past five years. 19 P a g e

26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 COMPLIANCE AND ENFORCEMENT: The department has increased its efforts over the past several years to ensure improved regional consistency and continuous improvement in its compliance and enforcement programs that are administered by DEP s district oil and gas offices. It should also be noted that the number of violations as a result of DEP s inspection efforts has been steadily decreasing over this same time period. The record suggests that DEP s compliance initiatives and outreach to unconventional operators are working as compliance rates are improving. Compliance Trends Compliance Inspections Total Inspections Unconventional Inspections Conventional Inspections Well Site & Administrative Inspections 28,000 2008 2009 2010 2011 2012 2013 The following graph indicates that the number of violations observed at unconventional oil and gas well sites has been decreasing throughout Pennsylvania since 2010. From 2010 until 2013, the number of violations at unconventional well sites decreased from 1,281 to 512. This represents a reduction of more than one half the number of violations during this four-year time frame. The number of enforcement actions has proportionally increased by percentage during this same time period. This suggests that although overall compliance by unconventional oil and gas operators has been improving, DEP has continued to vigorously pursue enforcement actions as warranted. 20 P a g e

Unconventional Shale Wells Compliance Violations and Enforcements 1,400 Unconventional Violations Unconventional Enforcements 1,200 1,000 800 600 400 200 0 2010 2011 2012 2013 STRAY GAS INVESTIGATIONS: One of the most important issues associated with oil and gas exploration and development pertains to the effective engineering and construction of oil and gas wells. If wells are not constructed or operated properly, there is a potential risk for natural gas to escape from the well bore and into subsurface geologic strata or groundwater sources. If this happens, it is called stray gas migration and the responsible operator is required by law to correct or mitigate the situation. Through efficient communication and collaboration with district oil and gas operations staff, the Office of Oil and Gas Management has created a database of stray gas case investigations. The information compiled dates back to 1987 and allows for critical data trend analysis and some level of forensic work aimed at identifying causes and solutions in the rare instances when operating oil and gas wells in the state have been found to not provide adequate protection of water resources. This invaluable summary of information helps to direct policy decisions and inform the development of focused new regulations. Following is a graph that identifies the number of stray gas investigations conducted by DEP from 2008 through 2013. For comparison sake, the graph also includes the investigations that were conducted by each district oil and gas office. 21 P a g e

# of Investigations Number of Stray Gas Case Investigations by District: 2008 to 2013 SW District NW District Eastern District Total 45 40 35 30 25 20 15 10 5 0 2008 2009 2010 2011 2012 2013 Year Stray gas investigations are primarily driven by complaints from individuals who believe their property may have been impacted by gas migrating into a water well or surface water body such as a pond, stream or wetland. Since natural gas is colorless and odorless, the most common indicators suggesting potential gas migration are the appearance of many tiny bubbles (i.e., effervescence) in tap water drawn from the supply or off-gassing from a water well or surface water body; or the sound of knocking in a water well that results when infiltrating gas disturbs the well pump. In some cases, an initial review of the complaint may reveal that the condition is, in fact, not related to gas migration. Such cases are tracked and responded to via DEP s Complaint Tracking System and are not cataloged as gas migration events. In other cases, the investigation might require a lengthy series of site visits and multiple rounds of lab analyses to reach a determination concerning the alleged gas migration event. It could take many months or even years to reach a final determination. After a thorough inspection, review of all laboratory analyses, an assessment of construction and integrity data and a geological assessment, DEP renders a determination regarding the event. The determination may result in either of the following findings: Positive Determination: The migration of gas is confirmed and is the result of hydrocarbon exploration and production activities. These findings are either documented through issuance of an official determination letter to the complainant, or, if no formal complaint is filed with DEP, the department documents which water 22 P a g e

# of New Cases supplies or residences have been impacted as a result of hydrocarbon exploration and production activities and responds as appropriate. Negative Determination: The presence of gas is either confirmed, but cannot be positively attributed to hydrocarbon exploration and production activities or, in certain cases, no gas is found. There are generally two classifications of natural gas biogenic gas and thermogenic gas. Biogenic gas is formed by microbial decomposition of organic matter nearer to the earth s surface; whereas, thermogenic gas is formed when organic matter in sedimentary rock is subjected to heat and pressure deep under the earth s surface. In some cases, Negative Determinations result when it is found that the type of gas detected is biogenic rather than thermogenic gas that is targeted during natural gas exploration and production activities. However, both gas types are found to exist naturally in portions of Pennsylvania s fresh groundwater system. The following bar chart identifies the number of confirmed Positive Determinations from 2008 through 2013 for gas migration cases investigated by DEP. If a stray gas investigation does not result in a confirmed Positive Determination, then it is not included in this bar graph. If a stray gas investigation extends from one calendar year into a future calendar year, the confirmed positive determination is reported in the year in which the investigation was initiated. DEP is currently conducting several investigations that are expected to be completed during 2014. Number of Confirmed Stray Gas Migration Cases: 2008 to 2013 35 30 25 20 15 10 5 0 2008 2009 2010 2011 2012 2013 Year The Pennsylvania Oil and Gas Regulation at 25 Pa. Code, Chapter 78, Subchapter D provides specific requirements for the construction of oil and gas wells including, but not limited to, casing and cementing practices. It also details requirements that operators must fulfill when a potential gas migration incident has occurred. The department updated these subsurface 23 P a g e

# of Water Supplies activities regulations to strengthen well construction practices that are required of operators and place many of the responsibilities of investigating stray gas incidents on the oil and gas industry. The revised rulemaking went into effect on Feb. 5, 2011. The department intends to further strengthen these subsurface activity regulations through a subsequent rulemaking package that it will initiate in 2014. 60 50 40 30 20 10 Number of Impacted Water Supplies Associated with Confirmed Gas Migration Cases: 2008 to 2013 0 2008 2009 2010 2011 2012 2013 Year The bar chart above identifies the number of drinking water supplies impacted by confirmed gas migration events. It is not uncommon for a single confirmed gas migration to affect multiple water sources. The Oil and Gas Act of 2012 presumes that an operator of an unconventional well is responsible for pollution of a water supply when the source is located within 2,500 feet of the unconventional well and when the pollution occurred within 12 months of the drilling, stimulation or completion of the unconventional well. Unless, the operator can successfully demonstrate that the pollution was not caused by its actions based on specific statutory defenses, the operator must restore or replace the affected water supply with an alternate water source. REGULATORY AND POLICY DEVELOPMENT: When the 2012 Oil and Gas Act was signed by Gov. Corbett on Feb. 14, 2012, it represented the first major overhaul of the commonwealth s Oil and Gas Act in 28 years. The act became effective within 60 days of passage, which required the Office of Oil and Gas Management to prepare new forms, standard operating procedures, guidance documents, policy statements and Frequently-Asked-Question responses. DEP provided training to the regulated community 24 P a g e

and the public on the new documents. The department successfully met that challenge by working to define specific planning and containment requirements of the 2012 Oil and Gas Act and conducting a series of outreach webinars to inform and train the public and regulated community on the new requirements. Regulatory Revisions for Surface Activities DEP s Oil and Gas program has devoted more than two years to developing a proposed rulemaking to amend the existing oil and gas regulations (25 Pa. Code, Chapter 78, Subchapter C) to specifically address surface-related activities at well sites in Pennsylvania. In particular, these regulations will address the requirements for pits, impoundments, temporary site containment, spill reporting and cleanup, site restoration, pipelines, horizontal directional drilling, water management plans and the road spreading of brine from conventional well sites. This rulemaking also serves to codify environmental provisions mandated by the 2012 Oil and Gas Act. A draft proposed rulemaking was presented to the Oil and Gas Technical Advisory Board on five separate occasions. The Oil and Gas Program also received input from multiple stakeholder groups including oil and gas operators/associations, the environmental community, municipalities and the public. On Aug. 27, 2013 this proposed rulemaking was presented to the Environmental Quality Board (EQB) for consideration and was approved for publication and a 60-day public comment period. The public comment period opened on Dec. 14, 2013 and was initially scheduled to close on Feb. 12, 2014. The EQB initially announced that it would host seven public hearings throughout each of the regions of Pennsylvania; however, to promote a greater level of public participation, the EQB and DEP in an unprecedented manner extended the public comment period for 30 additional days to close on March 14, 2014 and added two more public hearings. In addition to the public hearings, the department hosted two webinars to brief the public on the key provisions of the proposed rulemaking and inform the public how comments can be submitted to the department. The department will consider all comments received as it proceeds with the development of this final rulemaking. It is anticipated that a proposed final rulemaking will be presented to the Oil and Gas Technical Advisory Board in 2014. Regulatory Revisions for Unconventional Well Permit Fees As required by the Oil and Gas regulations, DEP prepared a three-year report on its fee structure and developed a proposed rulemaking to address the disparity between program income and program costs. This rulemaking proposes to amend the existing oil and gas regulations (25 Pa. Code, Chapter 78, Subchapter B) to modify the unconventional natural gas 25 P a g e