Fracking Industry Braces for a Wave of Regulation


A fracking wastewater pond in the Barnett Shale field in Texas. Courtesy: TXSharon, flikr.com

Intense debate over hydraulic fracturing and how to regulate it continues to engage the gas industry, environmentalists, the general public, and state and federal regulators alike. The industry and several state governors maintain that oversight should remain at the state level, where regulation of oil and gas production has traditionally taken place. Meanwhile, two federal agencies are expected to issue fracking regulations in the near future, and some local governments have even entered the fray by banning drilling activities within municipality borders.

This patchwork of requirements, most of them unsettled or not yet proposed, is daunting, not just for producers but for anyone interested in a steady supply of natural gas at a reasonable price. Regulatory uncertainty can be expected to cause fluctuations in price and supply.

In spite of these challenges, it is clear that hydraulic fracturing is here to stay. Although tighter regulation will bring associated costs, these are likely to be an improvement over existing uncertainty costs, at least if the regulation is reasonable. Because such regulation will help stabilize the U.S. market for natural gas, it is in the interest of all concerned to take part in the regulatory process and support reasonable proposals.

Regulatory Concerns

The most frequently cited environmental concerns associated with hydraulic fracturing are groundwater contamination; the generation of vast amounts of wastewater, for which there are limited disposal options; earthquakes; and air pollution.

Hydraulic fracturing is alleged to cause groundwater contamination in two different ways. First, the drilling process may release methane naturally present in underground geologic formations, allowing the gas to migrate to nearby groundwater supplies. Second, insufficiently sealed well bores and the fracturing process itself are said to allow the escape of fracking fluids. These fluids, which are injected into the well at high pressures to break up the underground shale and release the gas, contain numerous chemical additives, including, among other things, biocides to prevent bacterial sliming and corrosion, and friction reducers to enhance flowback.

Wastewater disposal poses a second set of concerns. Wastewater, or “flowback,” may contain both chemicals used in the hydraulic fracturing process and materials that occur naturally in underground geologic formations, such as radionuclides and metals. Typical wastewater disposal methods include transportation to publicly owned treatment works and disposal into underground injection wells, both of which have recently come under fire.

In early 2011 the New York Times published a series of articles purportedly based on internal Environmental Protection Agency (EPA) data that, it claimed, indicated the presence of radioactive material in wastewater processed by public works and released into Pennsylvania streams. Shortly after the article appeared, the Pennsylvania Department of Environmental Protection announced the results of its own study, which failed to identify any abnormal radiation levels. Public concern has nevertheless caused a broad shift from public disposal to the use of underground injection. Over the past year, in the wake of these claims, much of the wastewater generated in Pennsylvania was injected underground.

In the meantime, underground injection has also generated increasing concern. In 2011, several low-magnitude earthquakes occurred near the Northstar 1 disposal well outside of Youngstown, Ohio, prompting both widespread public speculation about the geologic effects of disposing of large amounts of fracking fluids underground and an investigation by the state Department of Natural Resources. In its preliminary report, the agency noted that it is very difficult to induce seismic events and that underground injection is highly unlikely to cause earthquakes. But it also concluded that because of “coincidental circumstances,” injection in the Northstar 1 well likely did cause the recent quakes. The agency emphasized the probable existence of “permeability zones,” which can allow injection fluids to seep into and cause movement along a fault. The US Geological Survey said last week that its own research also pointed toward wastewater injection as the cause.

In addition to groundwater contamination and wastewater disposal, air pollution poses a third concern. A new air quality study conducted near Colorado wells asserts that hydraulic fracturing releases several petroleum hydrocarbons—including benzene, a known carcinogen—that can cause neurological or respiratory effects, including eye irritation, headaches, sore throats, and difficulty breathing. The study, which has been widely reported, cited, and commented upon, is currently in press. Such information will generate local opposition to proposed operations, even as residents elsewhere welcome the economic benefits.

Besides posing immediate air quality concerns, fracked wells have also been said to release large amounts of methane, a potent greenhouse gas. Researchers at Cornell University recently argued that because the production process itself can generate high levels of emissions, natural gas may not deserve its reputation as a climate-friendly alternative to other fossil fuels.

The Federal/State/Local Debate

So far, oversight of hydraulic fracturing has occurred mainly at the state level, where the oil and gas industry has traditionally been regulated. States arguably are better positioned than the federal government to take account of location-specific geologic conditions and differing sets of options for wastewater disposal. Representatives of the oil and gas industry and several state governors have accordingly expressed support for continued state-level oversight, citing the states’ superior ability to create cost-effective regulations.

At the same time, it is clear that the federal government is taking an increasing interest in regulating hydraulic fracturing. Both Congress and the president have tasked federal agencies with investigating its environmental effects. The EPA is expected to release the first set of results from a congressionally mandated study on drinking water quality by the end of 2012. Meanwhile, the Shale Gas Production Subcommittee of the Secretary of Energy Advisory Board has issued two sets of recommendations that are aimed at shaping regulatory priorities. The Obama administration’s 2013 budget includes a $45 million multi-agency study of hydraulic fracturing that will expand the federal inquiry beyond water quality issues. Two federal agencies will soon issue regulations: The Bureau of Land Management (BLM) is planning to promulgate rules concerning fracking operations on federal lands, and the EPA will tighten Clean Air Act requirements as they apply to oil and gas production, including hydraulic fracturing.

On April 13, President Obama signed an executive order establishing an interagency working group to coordinate policy efforts among the federal agencies that oversee different components of the "development of unconventional domestic natural gas resources." Whatever direction this group takes, it is clear that federal regulators intend to take an active hand in overseeing the fracking industry.

While state and federal governments seek to limit some aspects of hydraulic fracturing, several municipalities have asserted authority, overtly or through zoning, to ban hydraulic fracturing entirely within their borders—a practice fracking advocates have labeled the “kiss of death” for the industry. State courts have reached different conclusions as to the validity of such measures, leaving their prevalence an open question. A West Virginia court recently invalidated a municipal ban that would have prevented drilling within a mile of city corporate limits. By contrast, two New York decisions have upheld bans under town zoning laws, finding that they are not preempted under state law. The New York decisions have been appealed. A bill currently pending in the New York legislature, if passed, would confirm the legitimacy of regulatory authority at the municipal level, thus settling questions about the validity of approximately 20 existing bans within that state.

Ohio and Pennsylvania, as part of new statutes regulating fracking, have stripped municipalities of the right to impose any regulation on the practice. In response, several Pennsylvania towns have sued, claiming that the exclusivity provision violates the state constitution, and an Ohio state senator has introduced a bill to restore some control to localities there.

State Regulation

Although specific requirements differ from state to state, there are a number of common trends. Several states, including Colorado, Texas, and Pennsylvania, now require producers to disclose the concentration of chemicals used in hydraulic fracturing, while some other states require disclosure of chemicals but not their concentrations. Industry continues to argue for protection of confidential business information, and some of these rules do contain exemptions for proprietary chemicals. However, increasing public demand to know what chemicals are used in hydraulic fracturing is very likely to lead to expanded disclosure requirements, whether at the state or federal level. Diesel fuel is also likely to be banned from fracking fluids.

State well construction standards, which exist in most states that allow hydraulic fracturing, are likely to undergo “tightening” revisions in response to consistent complaints and recent news coverage of contamination from well leaks. Pennsylvania and New York recently instituted new standards, and Ohio is currently considering a new rule.

Wastewater management is also likely to become a more significant issue. Since revising its rules in 2011, Pennsylvania now bans direct discharges from drilling sites and requires operators with especially high wastewater volumes to recycle wastewater on-site. Because of the publicity surrounding the Ohio earthquakes in 2011, producers are also likely to face a tightening of regulations concerning underground injection disposal. The Ohio Department of Natural Resources, for example, has announced its intent to strengthen permit requirements. Proposed reforms, which are briefly outlined in the preliminary report, include requiring permit applicants to submit available information concerning the existence of faults near proposed wells, along with plans for monitoring seismic activity. Producers will find it increasingly difficult to find legal alternatives for disposing of wastewater and will, accordingly, have to increase their use of on-site recycling methods. Although the need for new infrastructure investments may initially increase costs, producers may see costs stabilize as they rely less on disposal methods that are subject to shifting rules and political controversy.

Finally, several states are currently completing regulatory overhauls. New York is poised to lift a moratorium on hydraulic fracturing that has been in place since 2010. The state Department of Environmental Conservation has issued a Revised Draft Generic Environmental Impact Statement to address permit conditions for new operations. Meanwhile, there are more than a dozen bills pending in the New York State Legislature that would limit hydraulic fracturing. Pennsylvania’s Marcellus Shale Advisory Commission, tasked with evaluating that state’s regulatory regime, issued a set of recommendations for reform in July 2011. The Maryland legislature is considering two fracking-related bills, one of which would create a presumption of liability for gas producers where water supplies are found to be contaminated, while the other would fund a new environmental impact study by the governor’s Marcellus Shale Advisory Commission. And West Virginia’s Natural Gas Horizontal Well Control Act (effective December 2011) imposes a range of new permitting requirements, including fees for new wells, public notice, submission of wastewater management plans, and disclosure of fracking fluid additives.

Federal Regulation

There are several developments in the works at the federal level. In addition to conducting research on the environmental impacts of hydraulic fracturing, the federal government will soon impose new regulatory requirements on certain portions of the industry.

Perhaps the most anticipated federal development is the BLM’s proposed rulemaking, which the BLM is expected to issue this month. The rules, currently undergoing Office of Management and Budget review, would apply only to hydraulic fracturing on federal lands, but they would likely set a benchmark for future regulation of the industry. They are expected to include well-bore integrity standards, a chemical disclosure requirement, and wastewater disposal rules.

While the BLM addresses federal lands, the EPA is taking on water quality issues for hydraulic fracturing operations generally. The agency is largely barred from regulating hydraulic fracturing under the Safe Drinking Water Act by the so-called “Halliburton Exception.” However, it is expected to issue guidance documents pursuant to another statutory exception that allows it to regulate the use of injection wells for disposal of wastewater containing diesel fuels. The EPA also recently announced plans to initiate a rulemaking under the Toxic Substances Control Act to obtain data on chemicals used in hydraulic fracturing.

Water quality is not the only issue on the EPA’s radar. On April 18, the EPA issued new regulations using its authority under the Clean Air Act. The rule expands New Source Performance Standards to apply to gas wellheads and other equipment used in hydraulic fracturing. It also amends the National Emissions Standards for Hazardous Air Pollutants as they apply to oil and gas production, storage, and transportation. Under the rule, all fractured wells will eventually be required to use an emissions-reduction technology called “green completions,” which allows for the capture and sale of natural gas emissions. However, the agency is delaying implementation until 2015 to give industry time to acquire the technology.  In the meantime, producers can choose between green completions and flaring emissions.

Conclusion

As several states revise their regulatory programs and the federal government begins to take action, it is clear that the cost of natural gas will be affected. From the vantage point of gas users, however, the faster a regulatory regime is in place, as long as it is not completely unreasonable, the better. States may be the best bet to accomplish this in the short term, considering political uncertainty and gridlock in Washington, which is very unlikely to subside in an election year or on any short timetable thereafter.

Mark Fitzsimmons is a partner in the toxic tort and environmental litigation section, and Rachel Tennis is an associate in the litigation and environmental regulatory sections, of Steptoe & Johnson LLP in the firm’s Washington, D.C., office.