American Oil and Gas Reporter - May 2016 - 105

global gas and LNG research for Wood
Mackenzie.
Based on its proprietary global gas
model of the U.S. export trade, Wood
Mackenzie says global prices for oil and
coal will determine European spot prices
through coal/gas switching in the power
sector.
O'Rourke says that if oil prices remain
low, Russian oil-indexed contract gas will
remain cheap, and buyers will maximize
their off-take of Russian gas. At low oil
prices, he indicates customer choice rather
than strategic Russian decision making
would allow Russia to retain more than
30 percent of the 490 billion cubic meter
European market and threaten U.S. LNG
export volumes. If coal prices also remain
low, he predicts monthly European gas
prices could fall to $3.85 an MMBtu,
and utilization of U.S. LNG export capacity would average 85 percent between
2017 and 2020.

Falling Spot Prices
Russia's share of the European market
stands to decline to 25 percent if the
prices of oil and Russian contract gas increase, O'Rourke predicts. "Russia could
elect to make more pipeline gas available
at spot prices and increase market share
to as much as 35 percent, but in so doing,
European spot prices could fall toward
$3.00 an MMBtu for longer periods," he
assesses.
According to Wood Mackenzie, such
a market share strategy could reduce U.S.
LNG export utilization to 40 percent,
and would send a strong signal to deter
developers of future U.S. export projects.
While it could maximize profitability for
Russia under some oil and coal price
combinations, the company says it seems
an unrealistic outcome.
"In addition to undermining existing
contractual supply agreements, securing
additional pipeline access for export vol-

umes would require the tacit support of
Ukraine and the European Union, a dependence that appears politically challenging," O'Rourke reasons.
Tomnay says Russia's export strategy
will be a key determinant of U.S. LNG
export capacity utilization, but the Russian
pursuit of European market share to drive
U.S. LNG from Europe seems either uneconomic and/or impractical under several
external conditions.
"Instead, other factors such as the
price of U.S. natural gas, oil, and European
coal likely will be greater determinants
of U.S. LNG export capacity utilization,"
Tomnay judges. "Subject to these factors
alone, average utilization of U.S. LNG
export capacity between 2017 and 2020
could vary from 54 to 100 percent. For
U.S. LNG exporters, the best thing to
happen would be for global coal prices
to rise, or for U.S. gas prices to stay
low."
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AGENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FROM PAGE 31
nied the industry request on April 15.
PIPP and PIOGA appealed to the Pennsylvania Supreme Court on April 18, but
their request for a stay of IRRC's meeting
was denied on April 20, PIOGA reports.
PIOGA General Counsel and Vice
President of Government Affairs Kevin
Moody explains that the basis for PIPP's
lawsuit was Act 126 of 2014, the fiscal
code amendment to the state's fiscal year
2014-15 budget, which required EQB to
"promulgate proposed regulations . . .
relating to conventional oil and gas wells
separately from proposed regulations . . .
relating to unconventional gas wells."
But an article in PIOGA's April
newsletter points out, "When EQB voted
on the regulations in February, the board
didn't even bother with the pretense of
two separate votes on the conventional
and unconventional portions."
Moody comments, "We acknowledged
that EQB differentiated between the conventional and unconventional industry in
Chapters 78 and 78a, but it wasn't a separate proposed rule making and all the
things that go with that."
PIOGA has criticized the differences
between Chapter 78 (conventional wells)
and Chapter 78a (unconventional wells)
as "little more than a word-processing
cut and paste, (AOGR, February 2016,
pg. 99)." It notes that both require permit
applicants to identify potentially impacted
public resources, and place additional
requirements on wells located close to
parks, public forests, historic or archae-

ological sites, playgrounds and water
supplies. Both rules also require operators
to identify nearby abandoned, orphan
and inactive wells.
PIPP says its lawsuit asked the Commonwealth Court to declare the new regulations unlawful and unenforceable, to
enjoin the IRRC from considering them
at its April 21 public meeting, and to
order DEP and EQB to promulgate any
regulations governing conventional oil
and gas operations separately from regulations governing unconventional operations.
However, Commonwealth Senior Judge
James Gardner Colins refused, writing
in an April 15 order that "no relief can
be granted to PIPP . . . because its claims
are not ripe. Where the governmental act
that would affect the petitioner has not
occurred and it is uncertain whether it
will occur, the requirement of an actual
controversy is not satisfied."
Colins said if the IRRC approved the
regulations as promulgated, "PIPP and
its members may seek declaratory and
injunctive relief at that time."
Moody contends the judge missed the
point in focusing on IRRC's review. "The
fiscal code provision required DEP and
EQB-not IRRC-to propose regulations
separately for conventional and unconventional wells. The legal violation by
DEP and EQB had occurred already and
didn't depend on the conventional regulations becoming final," he argues. "Nothing IRRC did could change that because:

* "IRRC doesn't propose regulations;
* "DEP/EQB could promulgate these
regulations without change, even if IRRC
disapproved and recommended changes;
and
* "IRRC couldn't change the EQB
rules; only DEP/EQB can do that, and
they have shown absolutely no inclination
to do so despite the obvious legal and
operational flaws that have been pointed
out."
PIOGA says the Pennsylvania House
and Senate Environmental Resources and
Energy committees had 14 days to consider the IRRC's action, both of which
voted April 12 to disapprove the Chapter
78/78a rules. "It is likely the general assembly will pass a concurrent resolution
rejecting the regulations and that Governor
Tom Wolf will veto it," the association
surmised following the IRRC's vote.
Moody says that in accordance with
the court's decision, PIOGA must wait
until the regulations become effective to
renew its legal challenges. "By applying
inapplicable case law to an unprecedented
situation, the court unnecessarily delayed
judicial resolution of the fiscal code issue,
so it will be included with all the other
substantial grounds we have for invalidating these regulations," he states.
A statement by Babst Calland attorney
Jean Mosites, who testified at the IRRC
meeting, speculates that "barring unforeseen developments, the rule could be
published as final and immediately effective in June or July."
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MAY 2016 105

American Oil and Gas Reporter - May 2016

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