UPDATE 2-Cabot Oil to plug 3 Marcellus gas wells, pay fine

Thu Apr 15, 2010 4:18pm EDT

* Company to pay regulators $240,000, $30,000/month

* Called "most aggressive" action taken by Pennsylvania

* Shares close 12 cents lower

(Adds details, comments from DEP, changes dateline)

By Jon Hurdle

PHILADELPHIA, April 15 (Reuters) - Pennsylvania fined Cabot Oil & Gas Corp (COG.N) $240,000 and ordered it to permanently shut three gas wells in the state's most aggressive action so far to control development of natural gas in the Marcellus Shale.

The state's Department of Environmental Protection said Cabot failed to comply with a November 2009 order to fix defective well casings that discharged natural gas into groundwater, contaminating the drinking water of 14 homes in the rural community of Dimock, northeast Pennsylvania.

The new order directs the company to install permanent water-treatment systems in the homes within 30 days. Cabot must also pay a fine of $30,000 a month until it meets the DEP's requirements.

DEP Secretary John Hanger called the action the "most aggressive" taken by Pennsylvania so far toward any company drilling in the Marcellus Shale and said it should be taken as a warning to others that regulators will not tolerate the law violations.

The DEP also banned Cabot from drilling any new wells in the Dimock area for at least a year and blocked any new drilling statewide until it meets the requirements of the new order.

Cabot is seeking at least 25 additional drilling permits in other areas of the state, said DEP Secretary John Hanger.

Officials are looking at 15 other Cabot gas wells that may also be shut off if they are found to be the source of migrating methane, the statement said.

Recent exploitation of massive shale gas reserves in Pennsylvania and other states offers the United States a potentially abundant source of clean energy that would reduce dependence on imported oil.

But the Marcellus' development may be slowed by regulation as a result of fears about escaping methane and contamination of ground water by the chemicals used in the hydraulic fracturing drilling technique.

Concern about the drilling, also known as "fracking," has so far prevented its use in New York state and prompted a bill in Congress that would require companies to disclose the chemicals.

In November last year, Dimock residents sued Cabot, claiming gas drilling contaminated their water wells with toxic chemicals, caused sickness and reduced property values.

"Gas migration is a serious issue that can have dire consequences to affected communities and we will not allow Pennsylvania's citizens to be put in harm's way by companies that chose not to follow the law," said Hanger, in a statement.

Cabot agreed to provide potable water to the 14 households, and to pay the fines.

"This modified order does not impact the number of wells scheduled to be drilled under Cabot's 2010 drilling effort, nor will it impact our production guidance," Cabot chief executive Dan Dinges said in a statement.

DEP spokesman Tom Rathbun said the gas migration appears to have resulted from Cabot drilling through the shallow Devonian rock formation to reach gas in the deeper Marcellus reserve.

Hanger said Cabot has established the worst record in the industry.

"I'm glad to say that Cabot has so far been in a class by itself," Hanger told Reuters.

Cabot Oil shares closed down 12 cents at $40.39 in on Thursday on the New York Stock Exchange. (Additional reporting by Vinay Sarawagi in Bangalore; editing by Gopakumar Warrier and Andre Grenon)

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