The Great (Green) Opportunity in Appalachia

Although Appalachia has historically been known as an oil, gas and coal powerhouse, the region has great promise to become a hub of renewable energy investment and production in the coming years. Stemming partly from the Inflation Reduction Act (IRA), the Bipartisan Infrastructure Law, and related federal funding programmes, that promise of an energy transition in one of the USA’s most economically challenged regions could soon be a reality. The decline in the region’s coal economy, spurred by a national and global shift away from coal and towards natural gas, presents an opportunity for new economic development in the form of cleaner sources of energy – an opportunity that the states in the region are well positioned to seize.

Federal support for renewable infrastructure development in Appalachia

Various federal government initiatives support renewable energy infrastructure development in Appalachia. Federal tax credits, expanded under the IRA, have made possible new projects in Appalachian “energy communities”. In addition, in October 2023, the Biden Administration announced the Appalachian Regional Clean Hydrogen Hub (“ARCH2”), a network of hydrogen-focused projects spanning West Virginia, Ohio and Pennsylvania. This hub will establish projects that use natural gas – an abundant and low-cost resource in Appalachia – as feedstock to produce hydrogen, which will be used, in part, to produce hydrogen-based products, such as ammonia. Phase 1 of the hub – consisting of preliminary planning and analysis of the hub’s financial and technological feasibility and incorporation of comprehensive stakeholder and community input – should begin this year. Additional federal funding initiatives, discussed in more detail below, are also actively contributing to the development of renewable energy infrastructure in Appalachia.

State-level support and challenges for renewable development

State-level support for renewable energy development also plays a big role in Appalachia. For example, in 2023, West Virginia’s governor announced the world’s largest solar and storage microgrid will be built in West Virginia. Our Next Energy, an energy storage technology company, will assemble a lithium iron phosphate (“LFP”) utility-scale battery system at an existing industrial hub. West Virginia State Senator Glenn Jeffries initiated the project with Berkshire Hathaway Renewables, representing the importance of partnership between business and local government in renewable project development.

Renewable energy infrastructure development in the region faces challenges. States like Ohio and West Virginia remain highly supportive of fossil fuels, which have long been an economic driver in the region. Local sentiment and legislation, including Ohio’s declaration that natural gas is “green”, are seen by many as proof that parts of the region exhibit hostility toward renewable energy development. That sentiment is reflected in the number of anti-ESG (environmental, social and governance) bills lawmakers across Appalachia introduced in 2023 legislative sessions.

Marcellus-Utica shale and renewables – trends, developments and dynamics – 2024

Natural gas also continues to play an important role in the current energy mix and will likely continue to do so for decades. Indeed, federal government forecasts estimate that domestic demand for natural gas will equal approximately 22 Bcf (billion cubic feet) for 2024, an increase of 2 Bcf compared to 2023.

The Marcellus-Utica shale oil and gas formations are primarily in Pennsylvania, Ohio and West Virginia in the Appalachian Basin, the largest natural gas-producing basin in the United States. The region is estimated to hold 214 Tcf (trillion cubic feet) of natural gas reserves – enough to fuel the USA for almost seven years. Like other US oil and gas-producing regions, the Appalachian Basin is subject to the same global market conditions that determine hydrocarbon prices. The US Energy Information Administration anticipates that 2024 will witness an overall 1% decline in domestic natural gas production. This incremental decline has been spurred by low natural gas prices, partly driven by reduced natural gas consumption due to the wider availability of electricity generated from renewable sources. And yet natural gas production is expected to recover in 2025, spurred by rising natural gas prices.

Historical context and complexities

Shale gas development in Appalachia has come a long way since Range Resources drilled the first Marcellus well in 2004 in Washington County, Pennsylvania. The Marcellus-Utica shale now contributes 25 Bcf/day to the total US average natural gas production of 96.6 Bcf/day. Reaching this level of production has been a rocky road. Oil and gas development began in Appalachia in the mid-1800s, as did ownership severance transactions where the ownership of oil and gas rights was transferred separately from the surface, making it quite complex to establish oil and gas title. The region’s proximity to environmentally conscious populations and the opposition to new fossil fuel development add to the complexity.

Big opportunities and challenges exist

The Marcellus-Utica shale formation is positioned to be a dominant force in the energy world. The real question is not when the Appalachian Basin will reach its potential, but if, how and what it will take for the region to get there. 

Some of the conditions relevant to the development of the region include the following.

Fallout from the 2016 crash

During the “gold rush” of shale development – the post-2008 period during which natural gas production rapidly increased – regional banks and financial institutions aggressively courted producers. That interest soured around 2016 when realised natural gas prices in the region fell below USD1.50/MMBtu (metric million British thermal units). The natural gas price crash led to hundreds of bankruptcies, wiping out billions of dollars of debt and equity capital. The fallout from the financial shake-up resulted in many regional banks and financial institutions no longer providing traditional credit facilities to shale oil and gas companies.

New infrastructure and downstream projects are needed

Daily production in the Appalachian Basin has doubled in the last several years, now approximating 25 Bcf/day. As of early 2023, total pipeline takeaway capacity from the region was around 24 Bcf/day. Although the Appalachian Basin has the advantage of being close to major north-eastern cities, transporting gas to these markets can be difficult. Many existing long-haul interstate pipelines out of the Appalachian Basin are at – or near – capacity. To accommodate further growth, additional takeaway capacity and/or additional local demand are needed.

Additional infrastructure projects have been proposed, but many have not progressed. The 1.5 Bcf/day, USD8 billion Atlantic Coast pipeline was cancelled in 2020, the 1.1 Bcf/day PennEast pipeline (which received a favourable US Supreme Court ruling) was cancelled in 2021, the 0.5 Bcf/day Northern Access pipeline did not make it into service, and the 0.65 Bcf/day Constitution pipeline was cancelled in 2020. The proposed Cumberland Pipeline, a 32-mile natural gas pipeline intended to supply a new plant in Cumberland City, Tennessee, has also faced legal challenges.

A liquefied natural gas (LNG) export terminal for the Pennsylvania coast was also proposed in 2022. Such a terminal could serve as an export point for Appalachian natural gas. The proposed project, however, faced significant local opposition and was shelved after the Biden Administration paused issuing new LNG export licences.

Alternative development options and operating capital sources are growing

Energy infrastructure development, including both traditional oil and gas and renewables, is capital intensive. In addition to traditional forms of debt and equity, many capital providers now provide capital in exchange for the right to gas production or the corresponding revenue streams. These funding vehicles come in a variety of forms including “drillcos”, overriding royalty interests (“ORRI”), prepaid gas sales, asset-backed securities (ABS), volumetric production payments (VPPs), and farmouts. Renewable project financing structures can take on different forms compared to oil and gas projects due to renewable-energy specific considerations, including a developer’s desire to monetise a project’s federal tax credits. While some renewable energy projects may be financed using a traditional corporate finance structure, others may utilise limited recourse project financing structures, under which an entity is formed specifically to hold the project assets and debt. These structures can consist of both debt and equity components. In renewable energy projects, tax equity investment is common. Several tax equity structures exist, including sale leasebacks and partnership flips. Although the details differ under these structures, a third-party tax equity investor essentially agrees to invest cash into the project in exchange for federal tax credits from the project, which the developer often lacks a sufficient tax base to utilise. 

Big projects and local opposition

The Appalachian Basin is a paradox of sorts. On the one hand, it contains a world-class resource that is within a few hundred miles of most of the US population. On the other hand, there are vocal regional constituencies and interest groups that oppose new fossil fuel projects even if the development is displacing higher-carbon emission projects. Similarly, there are also regional groups that oppose new renewable energy project development. The legal challenges and political pressure raised by opponents can significantly delay projects. If there is uncertainty over obtaining project permits or approvals, companies will have difficulty predicting if and/or when a project will be approved, much less put into service, which makes informed investment decisions difficult.

But significant projects are being developed. In 2014, the Mountain Valley Pipeline (MVP) was proposed as a USD3.5 billion, 300-mile, 2 Bcf/day pipeline traversing north-western West Virginia to southern Virginia. Despite substantial opposition, including a Supreme Court battle, the pipeline finally went into service on 14 June 2024.

Basin and state-level trends and developments

Global commodity markets and local supply-and-demand forces create unique circumstances for the Marcellus-Utica basin. The region also faces increased attention as a place to develop renewable energy infrastructure. Some basin-wide trends include:

• M&A – these are expected to be focused on asset optimisation where acquisition targets are selected if they are accretive to the acquirer’s existing assets or operations.
• Distress – natural gas prices have declined compared to 2023 and have been below USD2/MMBtu for much of 2024, only recently rising above this rate. Realised prices for many Marcellus-Utica producers are lower (and, in some cases, lower than break-even). Unless companies can access capital to cover operating deficits, they will have difficulty restructuring their operations and/or remaining going concerns.
• Patriotic to produce – considerable recent disruption of energy markets, including Russia’s invasion of Ukraine, have caused natural gas prices to increase, which has created a growing sentiment that US producers have an obligation to help produce hydrocarbons for the US economy and for European allies.
• Renewable energy development – increased interest in, and government support of, renewable energy projects in Appalachia are driving development of renewable energy in the region. As solar and other renewable energy sources become cheaper, and capital becomes more plentiful, renewable energy projects should become more viable.

Some trends that may affect key states in Appalachia include the following:

Pennsylvania

Pennsylvania ranks second in the US for natural gas production. Production more than doubled in a decade, from just under 10 Bcf/day to over 20 Bcf/day. For the past five years, natural gas has made up the largest portion of Pennsylvania’s domestic electric generation mix. Marcellus-Utica wells are being permitted, drilled and completed with regularity. Infield gathering and related infrastructure are also regularly being built and put into service. Most regulatory gating impediments have been resolved and have not materially impeded the growth of the industry. Large infrastructure and downstream projects, on the other hand, especially closer to population centres, struggle to reach completion. Currently, portions of eastern Pennsylvania are witnessing higher-priced gas caused by a lack of pipeline capacity, despite increased production from the Marcellus formation. Pipeline projects constituting 2.4 Bcf/day of capacity are scheduled to come online in 2024, which should alleviate supply constraints.

Only 4% of Pennsylvania’s electricity was generated by renewable energy in 2022. Although Pennsylvania has not kept pace with the overall national growth of renewable electricity generation, federal programmes, including through the IRA, are expected to boost Pennsylvania’s renewable energy production.

Democratic governor Josh Shapiro remains committed to energy issues and, in particular, appears committed to advancing renewable energy production in the state. A few things to watch include Governor Shapiro’s announcement of a new energy plan consisting of two legislative initiatives, PACER and PRESS. If these are signed into law, PACER will create a cap and invest programme in the state, while PRESS will require the state to source 50% of its electricity from diverse energy sources by 2025, including 35% from clean energy. Additionally, Pennsylvania is the only US state to have secured two regional clean hydrogen hubs. The federal government will invest USD750 million in Philadelphia and the surrounding region through the MACH2 hub, while the federal government will fund up to USD925 million for the ARCH2 hub, in Appalachia, including south-western Pennsylvania. These hubs will consist of projects that will produce hydrogen using clean energy or natural gas.

Another development to follow stems from the Biden Administration’s April 2024 announcement of a USD156 million “Solar for All” grant to the Pennsylvania Energy Development Authority to assist it in developing long-lasting solar programmes to benefit disadvantaged communities.

Ohio

Ohio is the sixth-largest producer of natural gas and the 12th-largest producer of oil in the US. Only about 8.3% of Ohio’s power is generated by renewable sources. Ohio law requires that 8.5% of electricity sold by the state’s electric distribution utilities or electric services companies be generated from renewable sources by 2026. Ohio supports oil and gas development in the state and has a fairly predictable permitting process. Almost 3,000 shale wells have been drilled in Ohio, with over USD100 billion in investment in the state. Governor DeWine has also made a point of communicating that Ohio is “open for business” for upstream, midstream and downstream companies. Some steps that Ohio has taken include:

• Gas is green – in January 2023, Governor DeWine signed legislation declaring natural gas to be “green energy.” While the full implications of the move are still being assessed, at a minimum, it is considered a statement that Ohio encourages additional development of its shale resources.
• Leasing state parks – Ohio legislation passed on 7 April 2023 requires the leasing of public lands, including state parks, for oil and gas development. In November 2023, the Ohio Oil and Gas Land Management Commission approved nominations to lease Ohio’s largest state park and two wildlife areas for oil and gas development. Several local groups are suing the state agency.
• Renewable energy development – in 2023, Ohio generated 1,735 GWh of electricity from solar power, the ninth straight year it increased the amount of solar-generated electricity. While major solar projects are in the pipeline, others have faced challenges, including local resistance.

West Virginia

West Virginia is the fifth-largest oil and gas producer in the US. Unlike Ohio and Pennsylvania, however, only about 4% of West Virginia’s electricity comes from natural gas. Most still comes from coal, while approximately 7% comes from renewable energy sources. Like Ohio, West Virginia is generally supportive of oil and gas development and has a predictable permitting process. The state also shows greater promise for renewable energy development. Unlike many other states, it has an Office of Energy responsible for fossil fuels, renewables and energy-efficiency initiatives, as well as a requirement to formulate five-year State Energy Plans (although such plans often do not come to fruition). The development of its oil and gas resources has resulted in an approximately USD13 billion contribution to the annual state economy. Renewable energy development has resulted in approximately USD2 billion in capital investment in projects in the state, USD6.8 million in annual property, state and local taxes paid via renewable projects, and USD9.5 million in annual income to private landowners.

A few items to watch for in the state include the following:

• The issuance of the siting certificate for the state’s first combined cycle natural gas-fired power plant, approved by the West Virginia Public Service Commission in April 2024. Construction is set to begin in the last quarter of 2025.
• Renewable energy development in the state – in 2022, West Virginia had more clean energy jobs – about 18,000 – than coal jobs and it was also one of three states that added the highest number of clean energy jobs. Political support from key local leadership is also in place. The West Virginia Office of Energy has also been selected to receive a USD106 million Solar-for-All grant to help develop residential solar projects to benefit the state’s low-income communities.
• Appalachian Climate Technology (“ACT Now”) Coalition – ACT Now is a Build Back Better Regional Challenge grant recipient that is seeking to boost the region’s clean energy production, including by providing pre-development support to clean energy projects through one of its coalition partners, RePower Appalachia Renewable Energy Market Development.

Appalachian Litigation Updates

The substantial development of energy resources in Appalachia is accompanied by corresponding litigation. While a survey of all key recent decisions is beyond the scope of this article, some major litigation developments merit brief mention. In short, Appalachia has seen a wide range of different types of litigation, ranging from litigation concerning oil and gas leases (with a particular focus on royalty provisions), to litigation concerning wind-, solar- and hydropowered energy. 

The following is a summary of select key litigation from the past year.

• Corder v Antero Resources Corp, 57 F.4th 384 (4th Circuit 2023): this decision concerns three types of leases entered into by Antero and West Virginia landowners regarding oil and gas royalties – leases silent on the allocation of post-production costs, leases modified by a 2015 settlement agreement, and leases with a so-called “market enhancement clause”. The court determined that all leases were subject to a prior West Virginia Supreme Court decision, Tawney v Columbia Natural Resources, LLC, 219 W.Va. 266 (2006), which only allowed a lessee to deduct post-production costs from royalties if the lease “(1) ‘expressly provide[s] that the lessor shall bear some part of the costs incurred between the wellhead and the point of sale’; (2) ‘identif[ies] with particularity the specific deductions the lessee intends to take from the lessor’s royalty’; and (3) ‘indicate[s] the method of calculating the amount to be deducted from the royalty for such post-production costs.’”  The Fourth Circuit held that the Tawney requirements apply to leases that calculate royalties “at the well” through the point of sale, including those that look to the “value of the gas”. 
• Marcellus Shale Coal v Dep’t of Env’t Prot. of the Commonwealth, 292 A.3d 921 (Pa. 2023): the Department of Environmental Protection and the Environmental Quality Board (collectively, the “Agencies”) were given rule-making authority by the General Assembly in the Pennsylvania Oil and Gas Act of 1984. Pursuant to that authority, the Agencies created numerous regulations concerning the collection of information related to the issuance of permits for new unconventional gas wells. The Commonwealth Court concluded that the Agencies exceeded their authority because, in part, the regulations created a “pre-permitting” process for oil and gas wells without statutory authority. Accordingly, the Commonwealth Court struck down the regulations as void and unenforceable. The Pennsylvania Supreme Court reversed the Commonwealth Court’s decision, determining that “the Agencies did not exceed their legislative rulemaking power” and that the General Assembly “intended to give the Agencies the leeway to promulgate the challenged regulations and those regulations were reasonable.” In so doing, the Supreme Court reinforced the principle of deference to Pennsylvania agencies’ promulgation of regulations, despite federal agencies losing that same deference not long after. See Loper Bright Enters. v Raimondo, Sec’y of Commerce, No 22-451, 2024 WL 3208360 (US 28 June 2024).
• Tera, LLC v Rice Drilling D, LLC, 2024-Ohio-1945: in 2021, after a series of rulings in plaintiffs’ favour, a jury in the Belmont County Court of Common Pleas found that defendants, whose leases granted them rights to produce from the “formation commonly known as the Utica Shale”, had trespassed by producing oil and gas from the Point Pleasant formation, and awarded the plaintiffs over USD40 million in damages. The Court of Appeals affirmed, but on 23 May 2024, the Ohio Supreme Court reversed. The Supreme Court determined that the lease was ambiguous because there was conflicting evidence regarding whether the parties intended Point Pleasant to be considered part of “Utica Shale” when they entered into their lease. Thus, the Court remanded to the trial court. In a related case in a federal court in Columbus, similar claims were presented to a jury, which found in the defendants’ favour. Tera II, LLC v Rice Drilling D, LLC et al, No 2:19-CV-2221 (SD Ohio).
• In re Application of Alamo Solar I, LLC, 2023-Ohio-3778, a citizens group and residents challenged the Ohio Power Siting Board’s (the “Board’s”) approval of two large solar farms. The plaintiffs contended that the solar farms did not comply with regulations related to noise, visual impact, landscape, impacts on wildlife, flood control and pollution impacts. The Ohio Supreme Court affirmed the Board’s orders, rejecting the plaintiffs’ challenges based on a finding that the Board did not act unlawfully or unreasonably in approving the solar farms. By acknowledging, and rejecting, each argument of alleged non-compliance with various regulations, the Court brought to light the rigorous regulatory scheme that renewable energy farms can face.