Increasing Marcellus shale development has meant new rules of the road for many Pennsylvania municipalities, which, along with the Pennsylvania Department of Transportation (PennDOT), are stepping up efforts to make sure trucks carrying equipment for the industry help pay for road repairs.

The cost of maintaining roads to and around naturalgas wells can run in the millions of dollars, but when it comes to costs for local municipalities, producers seem to have it covered.

Many municipalities in Pennsylvania have opted for either a road use and maintenance agreement (RUMA) or posting and bonding to secure payment for road repairs. The majority opt for bonding.

A bond is purchased for $6,000 per mile for gravel roads and $12,500 per mile for paved roads.

Once the bond purchaser reaches 75% of their security for road damage, they must either repair the road or increase the bond amount, according to PennDOT.

As some might say: You break it, you buy it.

“We believe the industry is working very hard and performing very well in becoming an excellent partner,” PennDOT spokesman Steven Chizmar tells Midstream Business. “In fact, many of our secondary roads are seeing significant improvement from their efforts.”

Named for a distinctive outcrop near the village of Marcellus, New York, the Marcellus shale extends throughout much of the Appalachian basin. The play stretches across an area of 95,000 square miles from southern New York across Pennsylvania, into western Maryland, West Virginia and eastern Ohio.

It was formed by the accumulation of sediment into a sea and eventually buried over many thousands of years and compressed to produce organic-rich black shale. The shale contains largely untapped natural gas reserves, and its proximity to the high-demand markets along the U.S. East Coast makes it an attractive target for energy development.

‘Part of doing business’

Natural gas operators must document their truck routes to local and state road authorities, and bond those stretches of road where their load weight will exceed the posted weight. A bond secures the companies’ responsibility for damage, and a company can be held accountable for refusing to pay for repairs or if it goes out of business, according to Chizmar.

Since 2008, PennDOT has posted more than 3,000 miles of road to accommodate the increased traffic and damage from the Marcellus shale industry, according to the agency’s website. In some northeastern Pennsylvania counties, all four-digit state routes—known as secondary roads—are now posted.

In the Pittsburgh region, the bulk of new postings have been confined to Washington, Westmoreland, Greene and Fayette counties, where an additional 288 miles of road has been pegged with the a 10-ton limit, PennDOT data shows. Allegheny and Beaver counties, where there is little drilling, have seen only about 13 miles of road posted during that time.

“The roads weren’t built with our industry in mind, so our repairs are far more than patching the roads; we build them to last for generations of activity,” Matt Pitzarella, director of corporate communications and public affairs at Fort Worth-based Range Resources Corp., tells Midstream Business. “It’s part of doing business in the region.”

According to Pitzarella, the natural-gas industry has paid nearly $1 billion in road and infrastructure upgrades to-date. Through December 2011, Range Resources spent a total of $23.7 million on 475 wells, Pennsylvania Public Utility Commission (PUC) records show.

“To-date, our share is around $50 million,” Pitzarella adds. “The operators in northeast Pennsylvania probably pay the lion’s share. It’s a lot more rural there with less infrastructure.”

Although it’s often the “high-profile” issues in the Marcellus that most people pay attention to, he says, “the reality is that those sorts of controversies and disputes are few and far between. We have great working relationships with local and state governments as well as the communities where we work.”

“People have witnessed first-hand over the past eight years that this is an industry that provides tremendous benefit for the region and is made up of people who want to do things right,” Pitzarella says. “In exchange, we continue to provide shareholder value and huge benefits for the rest of the nation with more jobs and lower energy prices.”

‘Getting it right this time’

In addition to PennDOT, municipalities in Pennsylvania also can bond their own roadways. David Sanko, executive director of the Pennsylvania State Association of Township Supervisors (PSATS), tells Midstream Business that he’s been trying to convince all municipalities in Pennsylvania to pass ordinances that allow them to hold Marcellus companies responsible for road damage.

PSATS represents 95% of the land mass of the Commonwealth, and Sanko says he would like to see the state bonding limits increase to reflect the cost of road repair. Currently, the state limit is $12,500 per mile of paved road.

But what is of more concern to Sanko, he says, is the ability of small townships to pay for the maintenance of these new roads 10 or 15 years from now, when the companies may no longer be drilling in the region. He says he’s been advocating for a road-repair fund with revenue supplied by a natural gas severance tax.

With that in mind, what appears to be working best for both governments and companies are RUMAs, Sanko notes. Such documents guide when and where Marcellus trucks will travel, who will be responsible for repairs; even which construction firms are on standby in the event of road damage.

“For the most part, the industry’s been very cooperative and helpful in fixing the roads or making even bigger roads, but let’s be clear,” Sanko says. “They’re not doing it because they want to be good neighbors—they need to do it.”

And in the end, RUMAs allow municipalities to remain in control of which routes trucks travel, he adds. After years of deliberation on the issue, Pennsylvania legislators passed a bill—HB1950—overhauling the state’s natural gas drilling laws in February 2012. In an op-ed piece penned two months earlier, in December 2011, Sanko wrote: “In the last century, in the ‘race to embrace” coal, timber, oil and steel, Pennsylvania didn’t necessarily ‘get it right’ when it came to responsible development of those natural resources. In a new century, we have a new opportunity to ‘get it right this time.’”

‘Staggering by any measure’

Pennsylvania House Bill 1950 included a new fee section— Act 13—that placed a fee on every well drilling for gas in the Marcellus shale formation.

The fee, which is in addition to the more than $1.6 billion Marcellus shale operators have paid in taxes and road improvement investments over the past several years, represents a new revenue stream for communities where Marcellus Shale Coalition (MSC) member companies operate.

“At a time when budget shortfalls are stretching state and local governments to their limits, responsible American natural-gas production is helping to support tens of thousands of good jobs and providing enormous, much-needed revenues for critical services,” MSC president Kathryn Klaber said in a September 2012 statement.

The nearly $206 million will be distributed to counties and towns that have been impacted by the Marcellus shale to fix roads, restore water supplies, as well as other necessary expenses.

The $206 million was raised from 4,453 wells in the state, of which drillers have paid close to $198 million, according to the PUC. The Act 13 law requires drillers to pay $50,000 for each horizontally drilled well and $10,000 for each vertical well through 2011.

Off the top, $25 million will go directly to the state, while the remaining 60% will be split among 37 counties and 1,500 municipalities hosting gas wells.

Klaber called the amount “staggering by any measure” and said the amount “serves as a stark reminder that we must ensure that we have commonsense policies in place, especially local zoning uniformity, at the center of Act 13.”

“I was pleasantly surprised by the higher-than-expected revenues,” Washington County Commissioner Larry Maggi told the Pennsylvania Independent last fall in a September 2012 report. “Government has a habit of overestimating, so we didn’t expect that.”

With Washington County’s expected $5 million haul in fee revenue, Maggi said the focus would indeed be on rebuilding infrastructure such as like roads and bridges.

Chesapeake investment

In terms of payouts, Chesapeake Energy Corp. paid the most, with $30.8 million on 624 wells. Canada-based Talisman Energy Inc. paid $26.4 million on 540 wells, and Range Resources paid a total of $23.7 million on 475 wells.

“Community engagement is a major focus at Chesapeake and a key to our success in developing operations in new regions,” Dave David Spigelmyer, vice president, government relations, Eastern Division, at Chesapeake says in an interview with Midstream Business. “Early in our development of the Marcellus, Chesapeake foresaw the need for this investment and quickly developed procedures to successfully address it. The effort has proven its worth time and again in operational certainty, community appreciation and governmental acknowledgement.”

Over the past three years, Oklahoma City-based Chesapeake has invested around $320 million to upgrade and maintain more than 500 miles of state and municipal roads in its northern Pennsylvania operating area of Bradford, Susquehanna, Sullivan and Wyoming counties, according to Spigelmyer.

“Due to the pre-existing conditions of road infrastructure in northern Pennsylvania, Chesapeake invested in road enhancements and maintenance agreements that both ensured the long-term suitability of roads for our operations and provided the region with high-quality improvements that it hadn’t had previously,” he says.

“Additionally, Chesapeake has entered into road use maintenance agreements [RUMAs] with the vast majority of the municipalities in those counties,” Spigelmyer says. “These RUMAs allow Chesapeake to provide maintenance as necessary to ensure roads stay in conditions at or above what they were prior to Chesapeake’s use, without requiring municipalities to incur the expense of the alternative post-and-bond process.

With the passage of the impact fee in Pennsylvania, Chesapeake says it continues to be a responsible corporate citizen, paying its $33 million share on time. With the combined millions local governments will receive through impact-fee payments, they will have an ongoing funding source for traditional maintenance programs to address future road wear,” he says.

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