Pennsylvania regulators on Tuesday fined Chesapeake Energy Corp. $1.1 million for natural gas drilling violations, the largest penalty ever in the state's rapidly expanding Marcellus Shale bonanza.
Under a consent order signed Monday with the Pennsylvania Department of Environmental Protection, Chesapeake will pay $900,000 for contaminating the private water supplies of 16 residences in Bradford County in northern Pennsylvania.
Chesapeake, the largest Marcellus Shale operator, will also pay a $188,000 fine for a Feb. 23 fire at its drilling site in Avella, Washington County, in southwestern Pennsylvania.
"The water well contamination fine is the largest single penalty DEP has ever assessed against an oil and gas operator, and the Avella tank fire penalty is the highest we could assess under the Oil and Gas Act," DEP Secretary Mike Krancer said in a statement. "Our message to drillers and to the public is clear."
Some environmentalists who have been critical of the Corbett administration's close ties to the natural gas industry regarded the big fine as a positive sign.
"The amount is large enough to get the attention of the other drilling companies operating in Pennsylvania," said Jan Jarrett, president of Citizens for Pennsylvania's Future (PennFuture). "This action should also begin to restore public confidence in DEP's commitment to strong enforcement of our environmental laws."
David Masur, director of PennEnvironment, questioned the deterrent value of a $1 million fine for the nation's second-largest gas producer, which last year earned $1.7 billion in profits on $9.4 billion in revenue, and whose chief executive, Aubrey K. McClendon, famously earned a $75 million bonus in 2009.
"This is mostly a slap on the wrist," Masur said.
The DEP blamed improper concrete casings of several wells for allowing natural gas to seep into drinking-water supplies. In one instance, gas visibly bubbled to the surface of the Susquehanna River. The incidents occurred in Tuscarora, Terry, Monroe, Towanda, and Wilmot Townships.
Two Bradford County residents whose wells were cited in the consent agreement said they believed the contamination was more extensive than methane, which is not known to cause health problems. They suspect that chemicals are also polluting the aquifer.
"We're sick all the time," said Michael Phillips, who lives on Paradise Road in Terry Township, where Krancer visited some of the residents on Thursday during a tour through Bradford County.
The Chesapeake action is not the biggest Marcellus Shale settlement to date. In December, the DEP announced a deal with Cabot Oil & Gas Corp. of Houston to pay $4.1 million to residents in the northern Pennsylvania town of Dimock, where private water wells were also contaminated with methane gas. Cabot also agreed to pay a fine of $500,000 in the case.
Tuesday's announcement surprised Sherry Vargson, whose Granville Township family has been drinking bottled water supplied by Chesapeake since the well on her 197-acre farm went foul last June. She said the DEP's agreement contains little help for her family.
"It sounds like the state is going to get a chunk of change," she said. "But I still have contaminated water."
Vargson also suspects that chemicals have infiltrated her underground water supply. A 20-gallon water tank she keeps filled for her horse barely developed a crust of ice last winter even when temperatures reached 14 below zero. "That's scary," she said.
Chesapeake, which is based in Oklahoma City, will pay $200,000 of the $900,000 fine into the DEP's well-plugging fund. In addition, Chesapeake will establish an escrow account to cover the cost of water-treatment equipment on select water wells in the vicinity of the drilling activity.
Chesapeake said it had worked with the DEP to resolve the issues but said the blame for the gas migration issues was unresolved.
"Even though the results of our joint review remain inconclusive at this time, we believe proceeding with an agreement and taking prompt steps to enhance our casing and cementing practices and procedures was the right thing to do," said Brian Grove, senior director of corporate development for Chesapeake's Eastern Division.
The $188,000 Avella penalty was assessed after tanks on the Washington County well site caught fire Feb. 23 and injured three subcontractors. The DEP said Chesapeake mishandled natural gas liquids known as condensate, which are separated into tanks on the well site.
The fines are unrelated to an April 19 accident that Chesapeake had on a Bradford County well site in Leroy Township.
Chesapeake suspended hydraulic fracturing operations after the blowout incident last month but resumed operations Friday.
In a 700-page report delivered to state and federal regulators last month, Chesapeake said the environmental damage from the spill was limited. It said that 10,000 gallons of wastewater and rainwater escaped the well site and that a smaller amount reached an unnamed tributary of Towanda Creek.
It blamed the accident on an "extremely rare" failure of a flange on the wellhead.
"We are working together with the DEP to fully assess any potential environmental impact from the incident, which at this point appears to be very limited," Grove said in a statement Tuesday.
DEP spokeswoman Katherine Gresh said the state was still discussing potential enforcement actions against Chesapeake for the April incident.
Chesapeake is the largest operator working in Pennsylvania's Marcellus Shale, a geological formation that requires drillers to use a gas-extraction technique called hydraulic fracturing that has raised fears of river and groundwater pollution.
Most of the incidents for which Chesapeake was cited Tuesday occurred last year, under the Rendell administration. But environmentalists were reluctant to say Corbett's DEP was taking a harder line on drilling based upon one consent agreement.
"It's like you can't pick up the paper without the state looking like a bunch of Keystone Kops over all this drilling stuff," Masur said. "So maybe they just said, 'Look, we have to make some examples of some people, and these folks were at the front of the line.' "