1. w w w. j a c k s o n k e l l y. c o m Kenneth E. Tawney, Esquire 500 Lee Street East, Suite 1600, Charleston, WV 25301 Phone: 304-340-1189 Fax: 304-340-1080 ktawney@jacksonkelly.com www.jacksonkelly.com June 21, 2011 Notices of Violations and Consent Orders in West Virginia

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4. 4 Permitting Authority In order to commence any well work, a person or company must first receive a permit from the Office of Oil and Gas (OOG)In order to commence any well work, a person or company must first receive a permit from the Office of Oil and Gas (OOG) –W.Va. Code § 22-6-6 In addition to issuing a permit for well work, the OOG also issues a separate or consolidated water permit which governs and controls the discharge of pollutants into West Virginia watersIn addition to issuing a permit for well work, the OOG also issues a separate or consolidated water permit which governs and controls the discharge of pollutants into West Virginia waters –W.Va. Code § 22-6-7

5. w w w. j a c k s o n k e l l y. c o m 5 Penalty Provisions The Department of Environmental Protection has authority to issue citations for violations concerning both drilling and water useThe Department of Environmental Protection has authority to issue citations for violations concerning both drilling and water use –W.Va. Code § 22-6-3; § 22-11-6 An oil and gas inspector or agency director can find a violation of any provision of the West Virginia code, any rule, or any orderAn oil and gas inspector or agency director can find a violation of any provision of the West Virginia code, any rule, or any order

6. w w w. j a c k s o n k e l l y. c o m 6 Potential Water Violations Allowing sewage, industrial wastes, or other wastes, or the effluent therefrom, produced by or emanating from any point source, to flow into the water of the StateAllowing sewage, industrial wastes, or other wastes, or the effluent therefrom, produced by or emanating from any point source, to flow into the water of the State –W. Va. Code § 22-11-8 Failing to comply with water quality standards and effluent limitationsFailing to comply with water quality standards and effluent limitations –W. Va. Code § 22-11-6 Violating any provision of a prior Consent OrderViolating any provision of a prior Consent Order

7. w w w. j a c k s o n k e l l y. c o m 7 Possible Penalties For Violations An inspector can shut down operations until a violation is abatedAn inspector can shut down operations until a violation is abated If an imminent danger exists, the inspector can issue an order requiring the well operator to cease further operations until the imminent danger has been abatedIf an imminent danger exists, the inspector can issue an order requiring the well operator to cease further operations until the imminent danger has been abated –W. Va. Code § 22-6-3

8. w w w. j a c k s o n k e l l y. c o m 8 Possible Penalties For Violations If the inspector finds that the violation doesn’t present an imminent danger, he or she will determine a reasonable time in which the violation must be abatedIf the inspector finds that the violation doesn’t present an imminent danger, he or she will determine a reasonable time in which the violation must be abated –A “reasonable period of time” for a violation that doesn’t present an imminent danger shall not exceed seven days W. Va. Code § 22-6-3W. Va. Code § 22-6-3 –This period can be extended up to thirty days for good cause

9. w w w. j a c k s o n k e l l y. c o m 9 Possible Penalties For Violations Any person or corporation that willfully violates any provision or rule is subject to a civil penalty not to exceed $2,500 a dayAny person or corporation that willfully violates any provision or rule is subject to a civil penalty not to exceed $2,500 a day –W. Va. Code § 22-6-34

10. w w w. j a c k s o n k e l l y. c o m 10 Possible Penalties For Water Violations If any discharge or pollution constitutes a clear, present, and imminent danger to the health of the public, or to the fitness of a drinking supply, the director may issue an order requiring that the discharge be immediately stopped and abatedIf any discharge or pollution constitutes a clear, present, and imminent danger to the health of the public, or to the fitness of a drinking supply, the director may issue an order requiring that the discharge be immediately stopped and abated –W. Va. Code § 22-10-7

11. w w w. j a c k s o n k e l l y. c o m 11 Possible Penalties For Water Violations There is a cap on fines at $25,000 per day for any person or company that violates any provision of any permit issued under or subject to this articleThere is a cap on fines at $25,000 per day for any person or company that violates any provision of any permit issued under or subject to this article –W.Va. Code § 22-11-22 A company’s owner or operator can be found guilty of a criminal misdemeanor and sentenced up to six months in county jail for polluting water if he does so without a permit or refuses to comply with an issued permitA company’s owner or operator can be found guilty of a criminal misdemeanor and sentenced up to six months in county jail for polluting water if he does so without a permit or refuses to comply with an issued permit –W. Va. Code § 22-11-24

12. w w w. j a c k s o n k e l l y. c o m 12 Possible Penalties for Abandoned Well Violations Any person who fails to plug an abandoned well within thirty days from the ordered date can be fined $25,000Any person who fails to plug an abandoned well within thirty days from the ordered date can be fined $25,000 –W.Va. Code § 22-10-9

13. w w w. j a c k s o n k e l l y. c o m 13 Prior Policy on Calculating Penalties Seriousness : ________Seriousness : ________ Negligence : + ________Negligence : + ________ Good Faith: – ________Good Faith: – ________ History: + ________History: + ________ Economic Benefit:+ ________Economic Benefit:+ ________ Total:= ________Total:= ________

14. w w w. j a c k s o n k e l l y. c o m 14 Seriousness of Violation Based exclusively on the harm or potential harm to human health or the environmentBased exclusively on the harm or potential harm to human health or the environment –Minor - $200-$1000 No potential for harm/administrative violationNo potential for harm/administrative violation –Moderate - $1000-$2000 Potential to harm human health or environmentPotential to harm human health or environment –Major - $2000-$5000 Has resulted in harm or is an imminent dangerHas resulted in harm or is an imminent danger

15. w w w. j a c k s o n k e l l y. c o m 15 Negligence Reflects the amount of effort expended by the operator to prevent the violationReflects the amount of effort expended by the operator to prevent the violation –0% Increase in Base Assessment Beyond the operator’s control, so there was no negligenceBeyond the operator’s control, so there was no negligence –33% Increase in Base Assessment Oversight by operator, could have been avoided if more conscientiousOversight by operator, could have been avoided if more conscientious –67% Increase in Base Assessment Obvious and no action was taken prior to the violation being writtenObvious and no action was taken prior to the violation being written –100% Increase in Base Assessment Operator failed to adequately respond to instructions by inspector to prevent the situationOperator failed to adequately respond to instructions by inspector to prevent the situation

16. w w w. j a c k s o n k e l l y. c o m 16 Good Faith Refers to the promptness by the operator to abate the violationRefers to the promptness by the operator to abate the violation Reduces the penaltyReduces the penalty –50% Decrease in Base Assessment Operator was already taking remedial actions at the time the violation was writtenOperator was already taking remedial actions at the time the violation was written –25% Decrease in Base Assessment Operator took prompt remedial action and abated the violation within the initial or extended time periodOperator took prompt remedial action and abated the violation within the initial or extended time period –0% Decrease in Base Assessment Operator failed to take remedial actions to abate violation during abatement periodOperator failed to take remedial actions to abate violation during abatement period

17. w w w. j a c k s o n k e l l y. c o m 17 History of Prior Violations All violations written against the operator within the past 3 years are consideredAll violations written against the operator within the past 3 years are considered –1 – 5 Violations $200 –6 – 10 Violations $400 –11 – 15 Violations $800 –16 – 20 Violations $1600 –21+ Violations $3200

18. w w w. j a c k s o n k e l l y. c o m 18 Economic Benefit In addition to the above factors, a penalty includes an amount that represents the economic benefit the operator received through noncomplianceIn addition to the above factors, a penalty includes an amount that represents the economic benefit the operator received through noncompliance Includes delayed or avoided costs through:Includes delayed or avoided costs through: –Failure to install, operate, or properly maintain required treatment or control systems –Failure to conduct required testing or monitoring –Improper disposal –Failure to obtain necessary permits –Failure to establish or follow methods required by rules or permits

19. w w w. j a c k s o n k e l l y. c o m 19 New Approach to Assessing Penalties While this is the adopted assessment policy published on DEP’s website, the agency is currently assessing penalties for water violations in order to assess the higher penalties permitted for such violationsWhile this is the adopted assessment policy published on DEP’s website, the agency is currently assessing penalties for water violations in order to assess the higher penalties permitted for such violations

20. w w w. j a c k s o n k e l l y. c o m 20 Contesting A Notice of Violation Under Chapter 22, Article 6 Only 15 days to apply to the director of OOG for annulment or revision of a finding or orderOnly 15 days to apply to the director of OOG for annulment or revision of a finding or order –W. Va. Code § 22-6-4 The director then makes a special inspection after which an order is issued that includes findings and annuls, revises, or affirms the orderThe director then makes a special inspection after which an order is issued that includes findings and annuls, revises, or affirms the order –W. Va. Code § 22-6-4 All final orders issued by the director are subject to judicial review in circuit courtAll final orders issued by the director are subject to judicial review in circuit court –W. Va. Code § 22-6-5

21. w w w. j a c k s o n k e l l y. c o m 21 Contesting A Notice of Violation For A Water Violation If the director issues an emergency order, an operator must act immediately to comply with the order, but can submit a notice for appeal and receive a hearing within 10 daysIf the director issues an emergency order, an operator must act immediately to comply with the order, but can submit a notice for appeal and receive a hearing within 10 days –W. Va. Code § 22-11-19 All final orders issued by the director are subject to review by the Environmental Quality BoardAll final orders issued by the director are subject to review by the Environmental Quality Board –W. Va. Code § 22-11-21

22. w w w. j a c k s o n k e l l y. c o m 22 Consent Orders At any point after receiving a citation for either a drilling or water violation, an operator may settle the matter through a Consent OrderAt any point after receiving a citation for either a drilling or water violation, an operator may settle the matter through a Consent Order The company and the DEP will come to an agreement on what penalties the company will pay and what corrective actions it will take to prevent future violationsThe company and the DEP will come to an agreement on what penalties the company will pay and what corrective actions it will take to prevent future violations

23. w w w. j a c k s o n k e l l y. c o m 23 Office of Oil and Gas 601 57 th Street Charleston, WV 25304 (304) 926-0450 fax (304) 926-0452 Earl Ray Tomblin, Governor Randy C. Huffman, Cabinet Secretary www.dep.wv.gov www.dep.wv.gov CONSENT ORDER TO: [OPERATOR]DATE: February __, 2011 ORDER NO.: 2011-xxx INTRODUCTION This Consent Order (hereinafter “Order”) is issued by the Office of Oil and Gas (hereinafter “OOG”), by and through its Chief, pursuant to the authority of W. Va. Code §§ 22-1-1 and 22-6-1 et seq. to [OPERATOR]. (hereinafter “**” or “Operator”), collectively the “Parties”.

24. w w w. j a c k s o n k e l l y. c o m 24 Consent Orders Avoiding Future Liability In drafting the consent order, special precaution must be taken to ensure that your company is protecting itself against potential liability to third partiesIn drafting the consent order, special precaution must be taken to ensure that your company is protecting itself against potential liability to third parties The Order will contain both “Findings if Fact” and “Conclusions of Law”The Order will contain both “Findings if Fact” and “Conclusions of Law” –If not carefully drafted, these Findings of Fact could have the effect of admitting fault. This fault could then be used against you by a third party who is claiming damage –The Conclusions of Law outline the relevant sections of the West Virginia Code under which you are being cited. A blanket admission of violations could again open the door to further liability

25. w w w. j a c k s o n k e l l y. c o m 25 Consent Orders Avoiding Future Liability In West Virginia, the violation of a statute is prima facie evidence of negligenceIn West Virginia, the violation of a statute is prima facie evidence of negligence –Syl. Pt. 1, Anderson v. Moulder, 183 W.Va. 77, 79, 394 S.E.2d 61, 63 (1990). Thus, an admission that your company violated a statute could allow a third party to use that settlement agreement as proof of your negligenceThus, an admission that your company violated a statute could allow a third party to use that settlement agreement as proof of your negligence

26. w w w. j a c k s o n k e l l y. c o m 26 Consent Orders Avoiding Future Liability A prima facie case of negligence supports a jury finding of negligence which was the proximate cause of a plaintiff’s injuries without any other evidence –Morris v. City of Wheeling, 140 W. Va. 78, 82 S.E.2d 536 (1954)

27. w w w. j a c k s o n k e l l y. c o m 27 Consent Orders Avoiding Future Liability “Any person injured by the violation of a statute may recover from the offender such damages as he may sustain by reason of such violation, although a penalty or forfeiture for such violation be thereby imposed, unless the same be expressly mentioned to be in lieu of such damages.” § –W. Va. Code § 55-7-9

28. w w w. j a c k s o n k e l l y. c o m 28 Consent Orders Avoiding Future Liability The relevant contents of a settlement agreement can be discovered in a future third party caseThe relevant contents of a settlement agreement can be discovered in a future third party case –W. Va. Rules Evid. 408; Porter Hayden Co. v. Bullinger, 350 Md. 452, 469, 713 A.2d 962, 970 (1998)

29. w w w. j a c k s o n k e l l y. c o m 29 Findings of Fact FINDINGS OF FACT In support of this Order, the Chief hereby finds the following: OOG, an office within the West Virginia Department of Environmental Protection, is the agency with the duty and authority to execute and enforce W. Va. Code § 22-6-1 et seq., and the rules and regulations promulgated thereunder. Operator is a “person” as defined by W. Va. Code § 22-6-1(n), with an official address registered with OOG as **. Operator is the “owner” as defined by W. Va. Code § 22-6-1(l) of gas well identified as API # 47-51-***, also designated the [Farm Name] 1H, located in ** County, West Virginia, and was authorized by a well work permit issued by OOG to Operator on **, 20**. On [date], while in the process of drilling out three frac plugs on the [Farm Name] 1H, Operator experienced an equipment malfunction while trying to remove 2 7/8” tubing from the well. The tubing being used by Operator collapsed and failed which resulted in the escape of gas and completion fluids from the well for several hours. This potentially dangerous situation led to the notification of emergency responders, evacuation of nearby residents, closure of Route ** and the stoppage of electricity, all as precautionary measures.

30. w w w. j a c k s o n k e l l y. c o m 30 FINDINGS OF FACT Negotiate to have favorable facts included On [date], OOG Supervising Inspector ** issued Notice of Violation (NOV** to Operator for violating West Virginia Code §22-6-7(b)(1) for “... allowing pollutants or the effluent therefrom, produced or emanating from any point source, to flow into the water of this State.” There was no finding that pollutants or the effluent therefrom escaped from the well site. Assure that stated facts are accurate

31. w w w. j a c k s o n k e l l y. c o m 31 FINDINGS OF FACT Avoid cause and effect –Instead of “contractor allowed the gas buster tanks to overflow” –Say “the gas buster tanks overflowed” –(Unless you want to point finger at contractor)

32. w w w. j a c k s o n k e l l y. c o m 32 CONCLUSIONS OF LAW West Virginia Code § 22-11-3(23) defines “water” or “waters” as “... any and all water on or beneath the surface of the ground, whether percolating, standing, diffused or flowing, wholly or partially within this state, or bordering this state and within its jurisdiction, and includes, without limiting the generality of the foregoing, natural or artificial lakes, rivers, streams, creeks, branches, brooks, ponds (except farm ponds, industrial settling basins and ponds and water treatment facilities), impounding reservoirs, springs, wells, watercourses and wetlands.”

33. w w w. j a c k s o n k e l l y. c o m 33 ORDER FOR COMPLIANCE Findings. Operator does not admit to any factual or legal determinations made by the Office of Oil and Gas and reserves all rights and defenses available regarding liability or responsibility in any proceedings regarding Operator other than proceedings, administrative or civil, to enforce this Order.

34. w w w. j a c k s o n k e l l y. c o m 34 ORDER FOR COMPLIANCE Resumption of Activities. Upon execution of this Consent Order, the Operator is authorized to resume activities in West Virginia

35. w w w. j a c k s o n k e l l y. c o m 35 ORDER FOR COMPLIANCE Compare: –Operator agrees that the Findings of Fact in Paragraphs 1 through 13 above are true and correct.

36. w w w. j a c k s o n k e l l y. c o m 36 ORDER FOR COMPLIANCE 4. Corrective Actions. For all current and future Operator activities, Operator shall immediately and permanently implement the following practices: (a) Take all immediate steps to comply with W. Va. Code § 33-6- 7(b)(1), including, but not limited to, preventing pollutants or effluents therefrom, produced by or emanating from any point source, to flow into the waters of this State. (b) Unclear why this is necessary if there is already a legal obligation to do so (c) Could theoretically result in double penalties for violation of a statute and violation of a consent order

37. w w w. j a c k s o n k e l l y. c o m 37 Corrective Actions Consent Orders – Corrective Actions In the Consent Order, the DEP may want the operator to agree to take certain corrective actionsIn the Consent Order, the DEP may want the operator to agree to take certain corrective actions –These range from generic actions like “take all immediate steps necessary to comply with the code” –To specific actions like “cement all fresh water protection casings to surface,” or requiring that certain material be used in pipes or using a certain type of expensive blow-out preventer no other operator is required to use

38. w w w. j a c k s o n k e l l y. c o m 38 Corrective Actions Consent Orders – Corrective Actions Consent agreements create a situation where it is possible for the DEP to create different regulatory schemesConsent agreements create a situation where it is possible for the DEP to create different regulatory schemes –company-specific rules and regulations can be created on a case-by-case basis This can create unfair competitive advantages when one company is being required to implement expensive measures while competitors are notThis can create unfair competitive advantages when one company is being required to implement expensive measures while competitors are not It can also cause an industry standard to be created without the benefit of a period of notice and commentIt can also cause an industry standard to be created without the benefit of a period of notice and comment

39. w w w. j a c k s o n k e l l y. c o m 39 Corrective Actions Consent Orders – Corrective Actions Install gas detection monitors on rig floor and substructure on all rigs operating in West Virginia Installing an annular preventer along with a rotating head and diverter for all future drilling operations in West Virginia Installing fresh water protection casing prior to penetrating a known void where gas is known to exist for well control purposes Continue to supply, as available, information resulting from any investigation into the **, 20** incident.

40. w w w. j a c k s o n k e l l y. c o m 40 ORDER FOR COMPLIANCE After a full and complete negotiation of all matters set forth in this Consent Order, and upon mutual exchange of the covenants contained herein, the Parties desiring to avoid litigation and intending to be legally bound, it is hereby ORDERED by the Office of Oil and Gas and AGREED to by Operator as follows: Authority. This Consent Order is an Order of the Office of Oil and Gas authorized and issued pursuant to W. Va. Code §§ 22-1-1 and 22-6-1 et seq.

41. w w w. j a c k s o n k e l l y. c o m 41 Consent Orders - Penalties Also included in the Consent Order is the civil penalty assessment that the company agrees to payAlso included in the Consent Order is the civil penalty assessment that the company agrees to pay –This amount is negotiated with DEP –More difficult to negotiate

42. w w w. j a c k s o n k e l l y. c o m 42 Contact Information Kenneth E. Tawney, Esq. Jackson Kelly, PLLC P.O. Box 553 Charleston, WV 25322 ktawney@jacksonkelly.com (304) 340-1189 ktawney@jacksonkelly.com