HYDRAULIC FRACTURING POSITION PAPERJUNE 30, 2011

116 Cleveland Ave. NWCanton, OH 44702Phone: 330.453.5900Fax: 330.453.1793

The Issue: Horizontal Drilling and Hydraulic Fracturing in Stark CountyIn Stark County, two rock strata containing potentially vast oil and natural gas deposits are located several thousand feet below the surface. They are referred to as the Marcellus and Utica shale formations. While the Marcellus formation is a major shale strata in Eastern Ohio, the portion located in Stark County may be too thin for major drilling operations. However, energy companies have become increasingly interested in Stark County’s Utica shale formation due to its high potential for commercial oil and gas production. In fact, while the Stark County Recorder’s Office typically averages about 300 mineral rights lease filings a year, more than 1,000 were filed between July and December 2010 alone.1 Approximately 400 more were filed between January and April 2011.2

This increased lease activity has generated substantial media coverage and led to a public debate on the pros and cons of shale gas development. On the positive side, drilling creates new jobs, enhances local and regional economies, and helps reduce the nation’s dependence on foreign oil. However, the associated environmental, health and safety factors must be addressed.

To develop a highly-informed position on the issue, the Stark Development Board (SDB) recently formed a Committee to examine what is known about the two key technologies utilized in shale gas development: horizontal drilling and hydraulic fracturing. The group engaged a series of experts to learn more about the geological considerations; the economic and social impacts; federal and state regulations; and environmental, health and safety challenges.

Based on its research, the Committee has validated the advantages shale oil and gas production brings to Stark County, including job creation, business investment, sustainable economic growth and greater tax revenues that can be reinvested into the county. Still, certain environmental, health and safety challenges exist and must be addressed. These concerns are discussed in this paper, along with the Committee recommendations aimed at safeguarding the interests of Stark County’s residents – as well as other Ohio communities that could be impacted.

What is Horizontal Drilling and Hydraulic Fracturing?Horizontal drilling is used to reach targets that cannot be accessed commercially through conventional vertical drilling. It reduces the footprint of surface operations and expands the zone that can be accessed from a single vertical well. Energy companies now combine horizontal drilling with multi-stage hydraulic fracturing, which is specifically designed to liberate oil and gas from organic-rich shales. In this process, water, sand and chemicals are injected at high pressure into the shale in stages. Each stage opens up the shale around that portion of the horizontal leg to allow the oil and/or gas to more freely flow to the borehole. By repeating this process in several stages along the length of the horizontal portion of the well, long stretches of the formation are able to be put into production.

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1 CantonRep.com Staff Report. (January 18, 2011) Oil, Gas Developers Tap into Stark – Drilling to be Topic at Public Meetings. Available: http://www.cantonrep.com/news/x104379236/Oil-gas-developers-tap-into-Stark

2 Stark County Recorder’s web site. (April 25, 2011). Search available: http://www.co.stark.oh.us/internet/HOME.DisplayPage?v_page=recorder

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3 Geology.com (June 2011). Hydraulic Fracturing of Oil & Gas Wells Drilled in Shale. Available: http://geology.com/articles/hydraulic-fracturing

4 Considine, Timothy & Watson, Robert (July 24, 2009). An Emerging Giant: Prospects and Economic Impacts of Developing the Marcellus Shale Natural Gas Play, p. 18

5 Congressman John Flemming (June 23, 2009). Speech in the U.S. House of Representatives: Anti-fracing Legislation Would Have Far-reaching Negative Impact on Energy and Energy Producers and Consumers. Excerpts available at www.energyindepth.org/tag/haynesville

Hydraulic fracturing has been used to stimulate U.S. wells since the 1940s. Multi-stage applications with horizontal drilling are relatively new. In the past few years, the combined processes have successfully increased well productivity in several oil-bearing and gas-bearing formations, including the Haynesville and Fayetteville Shales of Louisiana, Texas and Arkansas, and the Marcellus Shale in the Appalachian Basin.3

Economic ImpactsCommunities where shale oil and gas has been developed have experienced robust economic growth. Case studies from around the U.S. show that drilling boosts the economy in many ways, including more spending, greater business investment, exponential job growth and increased tax revenues for local and state governments.

Increased Dollars in the Local EconomyIn Pennsylvania alone, Marcellus drilling activities added $4.23 billion to the state economy in 2008 through direct spending by energy companies, indirect spending by their suppliers, and induced spending by landowners and employees.4 This number is expected to nearly triple to $12.4 billion by 2015. Likewise, natural gas production from the Haynesville shale formation injected $4.5 billion into Louisiana’s economy in 2008 – creating an estimated $3.9 billion in household earnings in the same year.5

While these shales primarily contain natural gas, industry experts recognize that the Utica Shale in Stark County may produce significant oil in addition to large quantities of natural gas. This could generate even higher financial results for landowners, energy companies, local governments and local businesses due to higher market prices for oil.

According to a recent seminar in Pennsylvania, “Development Issues in the Major Shale Plays”, the value of a Utica oil well is possibly 3.5 times that of a Marcellus gas well. This equates to a potential $50 million revenue stream for a single Utica oil well over a 30-year useful life– which leads to more royalties and higher disposable income for landowners.

Local Business GrowthMany manufacturing companies in Stark County, and the Cleveland Plus corridor, produce raw materials, components and systems used in drilling applications. As horizontal drilling and hydraulic fracturing activities expand locally and nationwide, so will these companies’ revenues, which can be reinvested in their companies and local economies. In addition, Stark County’s involvement in oil shale drilling could attract new manufacturers to the area – creating more job opportunities for Stark County workers and supplementing local tax revenue.

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6 Considine, Timothy & Watson, Robert (July 24, 2009). An Emerging Giant: Prospects and Economic Impacts of Developing the Marcellus Shale Natural Gas Play, p. 30

7 Congressman John Flemming speech in the U.S. House of Representatives: “Anti-fracing legislation would have far-reaching negative impact on energy and energy producers and consumers”, June 23, 2009. Excerpts at www.energyindepth.org/tag/haynesville.

8 Bolias Caldwell, Jacqueline, Esq. (March 30, 2011). Presentation to Stark Development Board’s Blue Ribbon Fracing Committee: Regulator Constraints and Hydraulic Fracturing.

More JobsIncreased drilling activity requires more people to do work at every stage of the process, including leasing, drilling, well completion, production and distribution. In Pennsylvania, 30,000 jobs were created by Marcellus drilling activity in 2008. Projections show that the number of jobs created by Marcellus drilling could reach as many as 174,000 by 2020.6 It is possible that highly-productive Utica oil wells will present even more job growth opportunities than their Marcellus gas well counterparts. Other oil producing shales similar to the Utica, like the Bakken Shale in North Dakota and the Eagle Ford Shale in western Texas, are experiencing intense development and high yields. Their success rate also has contributed to some of the lowest unemployment rates in the U.S.

Greater Tax RevenueAny time economic activity increases, so does tax revenue at the local, state and federal levels. The growth of Marcellus drilling in Pennsylvania generated $600 million in taxes in 2008, of which $240 million was paid to state and local governments. In Louisiana, conservative estimates report that state and local tax revenues increased by at least $153.3 million in 2008 due to Haynesville drilling.7 Ohio’s tax structure does differ from these states, but revenues here would also be attractive – and would include income tax on personal income earned from sign-up and royalty payments to landowners, as well as state sales tax from business-to-business transactions.

Environmental, Health and Safety ImpactsWhile the economic potential created by drilling the Utica Shale is considerable, there are environmental, health and safety concerns that must be addressed to ensure the wellbeing of Stark County residents. Some challenges – like excessive traffic to and from drill sites – are related to transportation infrastructure, noise and other issues that could continue during the 10-15 year development phase. Others, like potential water contamination, hydrocarbon emissions and hazards from faulty well completions can have serious, long-term implications. The Committee has identified five major areas of concern:

Potential Water Contamination Some media reports have claimed that the actual process of hydraulic fracturing is a major cause of groundwater contamination. However, there are no confirmed incidents of this in Ohio or anywhere else in the U.S.8 The more common cause of water contamination is when well casings or containments fail due to poor material quality or improper installation. While rare, water contamination is a problem that can be catastrophic for those impacted by it. Fortunately, in Ohio, all citizens affected by the few instances of water contamination caused by poor material quality or improper installation have had alternative water supply provided as part of the remediation of these incidents.

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9 Tomastik, Tom and Bair, E. Scott (September 28, 2010). Presentation to Groundwater Protection Council: The “Bainbridge Natural Gas Incident” in Geauga County, Ohio: What Really Happened! Available: http://www.gwpc.org/meetings/forum/2010/proceedings/16Tomastik_Tom.pdf

The passage of Ohio Senate Bill 165 in 2010 increased regulations aimed at the prevention of water contamination from drilling and production operations. Oil industry experience has repeatedly proven that thorough regulation enforcement is critical to avoiding catastrophic problems. The environmental track record of the industry historically has been very good, but given the consequences of even a single failure, “very good” is not good enough to operate in a self-regulating oversight model.

Potential Air Pollution EmissionsIn all drilling and production activities of the oil and gas industry, ambient air emissions of hydrocarbons and other pollutants are present. The sources of these air pollutants can be from vehicle emissions; safety flares; gasoline or diesel powered generators and pumps; and oil/gas separation and storage tanks. The emissions from these sources must be identified both qualitatively and quantitatively. The Ohio EPA must assess these emissions and assure the community that all air pollution regulations will be met and that no negative health effects will result.

Noise PollutionAccording to the Ohio Department of Natural Resources (ODNR), excessive noise is the top complaint filed by people living near drilling sites. Noise comes from traffic to and from the drilling site as well as from the drilling process itself. While a nuisance, the problem is usually short-term – although some people have complained of noise even after wellhead completion.

Many energy companies, particularly those with experience drilling in highly-populated areas, use sophisticated sound barriers to curb the problem, but may not do so unless required. The ODNR addresses noise abatement in its permitting process.

Methane/Vapor IntrusionA rare but real risk related to well drilling and construction includes methane gas and vapor intrusion into homes and water wells. In December 2007, an explosion occurred in a Bainbridge Township home in Geauga County, Ohio, knocking it off its foundation. The explosion was caused by natural gas that had entered the basement.9 Natural gas also had migrated into several area water wells. Families were evacuated and 26 water wells were taken out of service. An expert panel later concluded that over-pressurization of the surface-production casing annulus in a nearby gas well caused the gas to migrate into nearby natural fractures and bedding planes, causing the incident. The energy producer paid to connect all impacted households to a city water line and plug the old wells.

However, in reviewing the Bainbridge incident, it is imperative that the Ohio Department of Natural Resources (ODNR) require State inspectors to be present during all critical times of drilling and well completion. Their presence will help ensure that all requirements imposed on the drilling companies by the ODNR are met. Traffic Volume and Damaging EffectsDrilling sites generate significant traffic during the drilling, fracturing and well completion phases. In addition to generating noise, excess traffic can damage roads. This leads to unscheduled maintenance requirements that have not been budgeted by the county, city or township.

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Currently, this issue is addressed by energy companies voluntarily entering into road maintenance agreements with the appropriate jurisdictions before drilling begins. These agreements generally state that the energy company will pay for any unscheduled road maintenance and repairs needed due to excess drilling traffic. While these agreements are voluntary, the Committee urges all energy companies to participate in this best practice.

Regulatory Environment When conducted properly, regulation can ensure that horizontal drilling and hydraulic fracturing are done ethically, safely and to the benefit of everyone in the community. The Committee believes that Ohio’s regulatory environment is already structured to address many issues related to environmental, health and safety concerns.

Regulatory AgenciesIn general, Ohio’s regulatory environment for horizontal drilling and hydraulic fracturing is considered advanced compared to some states. This is partially due to the fact that Ohio agencies and legislators have learned lessons and best practices from adjacent states like Pennsylvania and West Virginia, which already have several years of experience working with energy companies on Marcellus drilling projects.

In Ohio, there are several state agencies that oversee various aspects of drilling, including: • Ohio Department of Natural Resources (ODNR) and Division of Mineral Resources Management (DMRM): have general jurisdiction over production operations, with a specific focus on hydraulic fracturing operations, in Ohio. • Ohio EPA: regulates pollution of water and air as it relates to drilling activities. • Ohio Department of Health: generally regulates radiation.

Most notably, the ODNR has strong enforcement authority, which includes the ability to order a halt to production from any well that is in violation of any regulations, laws or statutes. ODNR can pursue fines, levies, and consent orders and cause affected water supplies to be replaced. ODNR inspectors are usually on site during the critical steps of the drilling and fracturing process to ensure that proper regulatory protocols are followed and risks are reduced. However, there is real concern that as drilling and fracturing activities intensify, there will not be enough inspectors and compliance officers to handle the increased activity and corresponding workload. In addition, there is a danger of losing ODNR personnel and potential candidates to energy companies, who are prepared to pay these geology and engineering experts more than what they can make working for the State.

Ohio Senate Bill 165In 2010, Ohio passed Senate Bill 165 – the first major revision to Ohio oil and gas law in 25 years. The bill provides for several significant changes, including: • Enhancedpermittingauthority, • Greaterfundingforoperationsandorphanwellplugging, • Additionalpermittingandnotificationrequirementsbyenergycompanies,and • Expandedenforcementprovisions.

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Under Senate Bill 165, Ohio regulations have been increased for every well phase, including site preparation; drilling and well completion; well stimulation (hydraulic fracturing); production; treatment and storage; waste management and disposal; plugging and restoration; and orphaned well sites. It also requires that all well activities are conducted in accordance with the Federal Safe Water Drinking Act. This is a significant factor because it prohibits underground injection of fluids unless authorized by a permit and adds a layer of protection for Ohio’s public drinking water systems.

In all, the Committee believes that Ohio’s existing laws, and ODNR’s role in enforcing them, are satisfactory. This conclusion is also reinforced by the January 2011 Ohio Hydraulic Fracturing State Review report by the State Review of Oil and Natural Gas Environmental Regulations (STRONGER). Based in Oklahoma City, STRONGER is a non-profit, multi-stakeholder organization that assists states in documenting the environmental regulations associated with the exploration, development and production of crude oil and natural gas. However, the Committee also believes that the ODNR must have adequate resources to enforce Ohio’s laws as drilling activity grows. The capacity to regulate must be managed to match the need of the active well drilling sites.

The Stark Development Board’s PositionDrilling in Stark County for Marcellus and Utica Shale oil and gas will have an extraordinary impact on the local economy. It will create jobs, encourage wider business investment in the area, and lead to greater tax revenues that can be reinvested in the county. However, the Committee acknowledges there are environmental, health and safety concerns that arise during the drilling and fracturing process. To mitigate these risks, the Committee encourages the State to: • Undertakeitsduediligence,ensuringthatlawsandstatutesareinplacetohelppreventpotential hazards; • Implementnewlaws,statutesandpermittingprocessestofillanyidentifiedgaps;and • ProvidetheODNRandotherrelevantregulatingagencieswiththefundingandresourcestheyneed to manage increasing drilling and fracturing activity.

To help identify areas for improvement identified during its own research, the Committee has included a list of specific recommendations below.

RecommendationsStrengthen the ODNR’s position to handle the rising volume of work associated with new horizontal wells.

Funding. While the ODNR may be able to manage its current workload, the rapid increase of drilling activity in Stark and surrounding counties will require more inspectors and compliance officers than current staffing levels will allow. The ODNR will also be in competition with energy companies for employees. The Committee recommends that the state look at additional ODNR funding opportunities through fees and taxes on the private drilling sector.

Benchmarking and research. By reviewing how other states’ practices and regulations have evolved over time, the ODNR can be more proactive about anticipating issues and developing ways to prevent them. In addition, reviewing negative incidents in other regions will help identify what best practices are required to avoid the recurrence of similar failures in Ohio.

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Training. The Committee recommends that ODNR personnel receive training specific to the horizontal drilling and hydraulic fracturing process. This will help personnel “speak the same language” as the energy companies they work with, and ensure that these companies are being forthcoming and truthful about their operations.

Create minimum applicable standards that must be met by energy companies and subcontractors to work in Ohio. To promote the highest quality of workmanship at all stages of the drilling and fracturing process, the ODNR should create a checklist of requirements that include surety bonds issued by a highly-rated carrier (A + or AA) and public liability insurance. The agency should consider setting more stringent standards for companies working in high-risk areas, such as densely-populated areas, areas near aquifers serving larger populations, and locations close to bodies of water. Drillers found to be problematic must be suspended temporarily or permanently. This should continue to be managed through the ODNR’s existing claims process, which assesses and prioritizes both the magnitude and urgency of issues and identifies required action.

Require that ODNR inspectors are always on site during critical times of well drilling. Currently, inspectors are on site for most critical drilling operations, but not all. Greater on-site presence will help ensure that safety, quality and process requirements are consistently met by the energy companies and their sub-contractors.

In the permitting process, mandate that producers benchmark groundwater quality before drilling and monitor it throughout well completion for hydraulic fracturing chemicals, methane gas and other contaminants. Such permitting should account for geology, aquifer characteristics, population and location of occupied structures – as well as location of sensitive receptors such as streams and existing groundwater wellhead production areas. ODNR geologists should permit each individual drill operation with specialized well construction requirements as needed, including groundwater flow rates.

Develop containment standards to minimize the potential damage of on-site spills. Set area and height requirements for containment liners to reduce the chance of spills impacting surrounding land, structures, roads and bodies of water. Also, require that a site remediation plan be developed prior to drilling that accounts for potential breaches.

Provide easy access to the chemical information for regulatory agencies and emergency first responders. Through bar code identification of chemicals used in the fracturing process, necessary parties will be able to respond more quickly to spill events and expedite remediation and emergency medical activities.

Emphasize thorough inspection of well construction and, to the extent possible, materials construction. Errors in well construction and casing and concrete placement are the most common causes of problems in hydraulic fracturing. Once identified, improper well construction must either be corrected or plugged in accordance with ODNR regulations.

Regulate the disposal of fracturing materials, flowback and brine. As specified in current state regulations, disposal of fracturing materials, flowback and brine should only be permitted in licensed injection wells and never in wastewater treatment facilities or a local body of water. If other states are permitted to dispose of their fracturing materials in Ohio, the State should consider charging higher fees on out-of-state disposal than what is charged to Ohio drillers.

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Appendix AStark Development Board Blue Ribbon Hydraulic Fracturing Committee Members

Appendix BDiscovery Process For SDB Position on Horizontal Drilling and Hydraulic Fracturing in Stark CountyThe SDB’s Blue Ribbon Hydraulic Fracturing Committee conducted extensive research in order to form a fair and balanced position on the practice of horizontal drilling and hydraulic fracturing in Stark County. The committee’s discovery process included a series of meetings with subject matter experts, including:

William G. Bittle, PhDEmeritus Dean – Kent State University at Stark

Jonathan ChastekManager, Economic Development – Wheeling & Lake Erie Railroad

Raymond Fryan, PhDDirector, Advanced Engineering and Quality, Steel – The Timken Company

Joe HalterPresident – Solmet Technologies

Charles Hammontree, P.E.President and CEO – Hammontree & Associates

Meeting Date

3/2/2011

3/15/2011

3/30/2011

4/13/2011

5/3/2011

Topics

Overview of Utica Shale

What is Horizontal Drilling?

What is Hydraulic Fracturing?

Economic Impacts of Shale Drilling

Regulatory Constraints and Hydraulic Fracturing

Handling and Disposal of Fracturing Water

Impacts on Roads and Other Infrastructure

Drilling Site Visit

Speaker(s)

Tom Tugend and Chris Perry,Ohio Department of Natural Resources (ODNR)

Tim Considine,University of Wyoming

Jaqueline Bollas-Caldwell,Krugliak, Wilkins, Griffiths & Doughtery

Rick Simmers, ODNR

Ryan Dean, Chesapeake Energy

William Williams, Krugliak, Wilkins, Griffiths & Dougherty

Neider Drilling Site, Carroll CountyOhio State Route 39, 5 miles NE of Carrollton

Randy HuntPartner – Krugliak, Wilkins, Griffiths & Dougherty

Dick MaggiorePresident and CEO – Innis Maggiore Group

Ronald Rusnak, Jr., MDEmergency Medical Physician and Chief Medical Information Officer – Aultman Hospital

Rodger McKainVice President, Government Programs – Rolls Royce Fuel Cell Systems

Robert PattisonRetired Canton Health Commissioner