Marcellus Shale operator EQT Corp. (NYSE: EQT) faces a record fine over accusations of a major pollution incident from two years ago in Tioga County, Pa., state officials said.

The Pennsylvania Department of Environmental Protection (DEP) said Oct. 7 it filed a lawsuit with the state Environmental Hearing Board requesting a $4.53 million civil penalty be levied against one of the company’s divisions, EQT Production Co. of Washington, Pa.

The fight rapidly turned nasty Oct. 7 with the agency saying EQT essentially ignored its requests and disregarded safety. EQT responded that the DEP is misstating facts and seems more interested in chasing press coverage than recognizing the company’s remediation efforts and cooperation.

At issue is EQT’s 6 million gallon impoundment at the company’s Phoenix Pad S location in Duncan Township, Tioga County, Pa.

The DEP said the company had indicated the impoundment would be used to store fresh water only.

“However, after construction was completed in late 2011, the company decided to use the impoundment to store flowback water from Marcellus drilling operations to be used for fracking,” the agency said.

The unauthorized change compromised the site since no monitoring wells or leak detection was required to be installed around the impoundment.

Leaks were subsequently detected in the impoundment and reported by EQT, the state said.

“EQT demonstrated a lack of cooperation by adding more flowback water to the impoundment even after becoming aware of the elevated chlorides in nearby monitoring wells,” the agency said. “A DEP inspection done in June 2012 after the impoundment was emptied verified 75 to 100 holes in the liner as estimated by EQT. EQT later revised this estimate to be over 200 holes.”

The company failed to recognize the ongoing environmental harm from the significant amount of waste released by its leaking 6 million gallon impoundment, said Dana Aunkst, acting DEP secretary.

“This action was necessary because the company has not been cooperative during our investigation. The department does not tolerate this unacceptable attitude toward compliance and proper protection of Pennsylvania’s environment,” Aunkst said.

EQT responded by filing a court complaint challenging DEP’s interpretation of the state’s Clean Streams Law.

In a news release, EQT said the agency insisted on a $1.27 million penalty during settlement talks with no room for discussion or negotiation.

Lewis B. Gardner, EQT general counsel and vice president, external affairs, said attempts to clarify the law were shut down during negotiations.

“It creates uncertainty and leads to the absurd result of never-ending and unquantifiable liability,” Gardner said. “The timing is suspect, and the exorbitant proposed penalty is inconsistent with both past and recent agency practice. The DEP’s proposed penalty seems designed more for headlines than for the lawful enforcement of the Commonwealth’s environmental statutes.”

When EQT became aware that the impoundment was potentially leaking in May 2012 it notified the DEP, discontinued using the impoundment and removed all fluids and solids, Gardner said.

EQT discovered damage to the bottom of the liner, which the company said was caused by a third-party vendor conducting DEP-approved water treatment. EQT began remediation efforts, and by mid-September 2012 contaminated soil beneath the liner had been removed.

“Subsequent sampling confirms the site meets statewide, health-based, soil clean-up standards; and a third-party consultant has concluded that a nearby High Quality stream is biologically healthy and sustaining a wild trout population,” EQT said.

Gardner said the company agrees a reasonable penalty is appropriate to hold EQT accountable for the actions of its contractor. However, he said the agency is overreaching in its interpretation of the law in an attempt to justify an excessive demand.

“It is an utter waste of EQT and taxpayer resources for the parties to follow the usual administrative process while this fundamental legal issue is left unresolved by the courts,” Gardner said.

The proposed fine against EQT would overtake the penalty against Range Resources Corp. (NYSE: RRC) for violations at six of its Washington County, Pa., impoundments.

In September, a consent order required the company to pay $4.15 million, the largest fine against an oil and gas operator in the state’s shale drilling era.

It was also ordered to close five impoundments and upgrade two other impoundments to meet heightened standards under development at DEP.