Cabot, Pa. Regulators Settle Water-Contamination Dispute

Cabot Oil & Gas Corp. (COG) has agreed to pay $4.6 million to Pennsylvania regulators and 19 rural households whose drinking water state officials claim was contaminated by the company's nearby natural-gas drilling activities.

The settlement, announced Thursday, will allow Houston-based Cabot to resume drilling in northeastern Pennsylvania's Susquehanna County early next year.

It also greatly reduces the amount the company had been expected to pay to resolve the matter: In early October, the Pennsylvania Department of Environmental Protection Agency said it wanted Cabot to pay for an $11.8 million water line to the Dimock Township homes whose water wells had been contaminated by methane.

Cabot holds about 200,000 acres--nearly all in Susquehanna County--in the vast oil- and gas-bearing Marcellus shale formation that underlies much of Pennsylvania, New York, Ohio and West Virginia. The process of cracking open the deeply buried shale to unleash fossil fuels is known as hydraulic fracturing, or fracking, and has been blamed for, but hasn't been conclusively linked to, contamination of aquifers in several U.S. states.

From the onset, Cabot has maintained that its operations weren't to blame for the Dimock Township water contamination.

In settling the matter, Cabot doesn't admit that its drilling operations caused the contamination, an Environmental Protection Department spokesman said.

"This agreement provides a reasonable and pragmatic way forward for all parties," Cabot Chief Executive Dan O. Dinges said in a prepared statement. "The common ground we found to settle provides the right balance of regulations, financial payments, timely execution and operational safeguards."

Of the $4.6 million Cabot will pay, $500,000 will go to the state to offset costs related to two years of investigation into the matter. The remaining $4.1 million will be paid into an escrow account for eventual distribution among the 19 affected households. Each household will receive an amount equal to two times their property value, but no less than $50,000, the Environmental Protection Department said.

Cabot will also provide whole-house water-treatment systems for each of the families who want one.

"The 19 families in Dimock who have been living under very difficult conditions for far too long will receive a financial settlement that will allow them to address their own circumstances in their own way," said John Hanger, who heads the state agency.

Cabot still faces civil lawsuits filed by Dimock residents in the U.S. District Court in Scranton, Pa. Some of the plaintiffs are among the 19 households Pennsylvania regulators have identified for the settlement, though Thursday's agreement will have no impact on the litigation, said Cabot spokesman George Stark.

Beyond the drinking water-contamination issue, that federal civil suit seeks damages for chemical spills in the area. Cabot was cited by regulators for three spills of chemical-laced hyrdaulic-fracturing fluid at its drilling sites there last year.

Analysts with Jefferies & Co. said the settlement, along with recent air-quality permits Cabot recently received in Pennsylvania, indicate that the icy relationship between the company and the state's regulators "may be thawing."

Cabot said it will be able to complete the wells it has underway in the Dimock area during the first quarter of 2011 and should begin drilling new wells there in the second quarter.

Shares of Cabot traded up 15 cents, or 0.42%, at $36.29 on Thursday.

-By Ryan Dezember, Dow Jones Newswires; 713-547-9208; ryan.dezember@dowjones.com

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