Courtesy: Pavillion Area Concerned Citizens
There seems no end to the commentary on hydraulic fracturing and how it should be regulated. Concerns about fracking’s risks to human health and the environment have led to fierce opposition among environmentalists and some localities, recently dramatized in Matt Damon’s film “Promised Land,” a story about a small American town’s fierce opposition to proposed natural gas development played in formulaic Hollywood fashion for maximum good David versus bad Goliath effect. On the other side of the spectrum, fracking’s proponents argue that the risks are exaggerated and that such unfounded concerns may interfere with the technology’s enormous potential for reinvigorating the U.S. domestic energy market and economy. Industry supporters have pointed to the Environmental Protection Agency’s (EPA’s) recent study of drinking water in Dimock, Penn. as evidence that the “crusade” against hydraulic fracturing is unwarranted. After residents expressed concern to the agency last year, the EPA conducted two rounds of sampling at four wells and concluded that the water was safe to drink.
Whatever your opinion on fracking, it is clear there will be significant investment and development going forward. Government estimates of U.S. shale gas reserves have increased over the past five years, and some researchers claim that even those increased estimates are grossly understated. In its 2012 Annual Energy Outlook, the Energy Information Administration (EIA) reported that the U.S. has 2,203 trillion cubic feet of technically recoverable natural gas—enough to supply more than 90 years of use at 2011 consumption rates. The EIA also predicts that the U.S. will become a net exporter of natural gas by 2020. A study prepared for America’s Natural Gas Alliance predicts that by 2035 the U.S. shale gas industry will support 1.6 million jobs, contribute more than $231 billion to the GDP, and add $57 billion in government revenues. Meanwhile, legal and technical barriers could delay shale gas development in other parts of the world for up to a decade. (In the European Union, several countries, such as France and Bulgaria, have passed laws banning fracking.) Particularly in this economic climate, these numbers are impossible to ignore.
How much of this potential will be unlocked ultimately depends on several factors, not least the development and stabilization of a still-uncertain and multilayered regulatory regime. Fracking currently is regulated chiefly at the state level, and industry generally supports continued state-level regulation. In waging its battle against state regulators, the anti-fracking movement has succeeded in persuading local officials to further limit the practice at the municipal level. Many localities have instituted zoning controls or outright bans, though they have had mixed results defending these laws against state constitutional challenges.
Meanwhile, the federal government has shown increasing willingness to regulate fracking. The Obama administration has been cautious initially, focusing largely on research and promoting regulatory efficiency. In April, industry praised President Obama for creating an interagency working group to coordinate efforts among the EPA, the Department of Energy, and the Department of the Interior. At the same time, some federal agencies have begun to exercise their regulatory authority. The Bureau of Land Management’s (BLM’s) proposed rule for regulating fracking operations on federal lands and the EPA’s new Clean Air Act requirements for natural gas wells represent the most significant developments to date. It remains to be seen whether the administration’s reelection “mandate” will include stricter controls.
As this complicated regulatory framework continues to develop, it will require careful monitoring by any company reliant on expectations of inexpensive and abundant natural gas. Following our earlier article on U.S. fracking regulation last year, this article provides an update on the significant developments of recent months.
State Regulation: A Range of Approaches
State fracking laws differ widely. At the most stringent, a few states continue to enforce statewide bans or moratoria. Of states that allow fracking, some have very specific requirements, while others rely on performance-based standards or permit-specific controls. States with similar laws on the books may also enforce them very differently. An ongoing survey of state regulations shows that many states have requirements related to site development and preparation, well drilling and production, flowback/wastewater storage and disposal, and well plugging and abandonment.
Several states in the mid-Atlantic’s Marcellus Shale region that have been cautious about allowing fracking in the past appear to be moving toward a somewhat more tolerant stance. New York has had a moratorium on fracking since 2008, when the state Department of Environmental Conservation began studying health impacts. Although the moratorium was set to expire on November 29, 2012, it was extended for 90 days to await completion of the ongoing study. Meanwhile, New York has issued a new set of draft regulations that would open a large swath of the state to fracking—but with significant limitations. Both environmental and industry groups have criticized the changes, which currently are open for public comment until January 12. New Jersey is also poised to move forward. In early 2012, Governor Chris Christie vetoed a bill that would have imposed a statewide fracking ban, instead instituting a one-year moratorium to allow the New Jersey Department of Environmental Protection to “evaluate the findings of still outstanding and ongoing federal studies.” The moratorium is set to expire on January 27, although there is now a bill pending in the New Jersey legislature that would establish a new moratorium. Since there are no known shale gas deposits in New Jersey, the level of attention devoted to regulation there is somewhat surprising. Maryland, which has also had a de facto moratorium on fracking since 2011 while the state conducts safety studies, remains more uncertain. In response to recent industry pressure to move ahead, one Maryland legislator has announced her intention to propose a formal statutory moratorium in 2013.
Pennsylvania has undoubtedly been the state most enthusiastic about Marcellus Shale development. In February 2012, Pennsylvania passed new legislation to further encourage the state’s already robust natural gas industry. Among other provisions, the new law included a statewide zoning plan to reduce municipalities’ ability to prevent fracking within their borders. Several municipalities challenged the law in state court, and on July 26, 2012, a seven-judge panel invalidated the statewide zoning program. Three judges dissented from the decision, which the state appealed to the Pennsylvania Supreme Court. The case was argued in October, and the decision is still pending. Even if the state does not succeed on appeal, the new law will still encourage municipalities to allow fracking by providing for impact fees, which producers must pay to communities to cover impacts on roads and services. Along with likely developments in New York and New Jersey, this change will contribute to the Marcellus Shale’s growing importance to national shale gas production.
Several states outside of the Marcellus Shale region are also in the midst of regulatory overhauls. In July, the North Carolina legislature legalized fracking over Governor Beverly Perdue’s veto, but provided that no permits may be issued until a regulatory program has been established and approved by the legislature. The Texas Railroad Commission, that state’s oil and gas regulatory agency, is updating its rules concerning drilling, cementing, and completing oil and gas wells. On the West Coast, the California Department of Conservation released proposed rules on December 18, and the California legislature will consider fracking legislation in its new session. The Alaska Oil and Gas Conservation Commission has also proposed new regulations.
In response to health and safety concerns, several states have beefed up requirements related to well construction and setback, chemical disclosure, and wastewater disposal. Pennsylvania recently issued new regulations requiring operators to develop emergency response plans. Both Ohio and Pennsylvania included new well-casing and siting requirements in their 2012 laws. Many states now require disclosure of chemicals used in fracking fluids, though the specific rules vary. Some states require industry to disclose both the volume and concentration of chemicals used (Arkansas, Louisiana, Montana, Ohio, and Pennsylvania), while others require only volume (Maryland, Minnesota, New Mexico, and Oklahoma) or concentration (Wyoming). Protections for confidential business information also differ. Ohio’s rule does not require any disclosure of trade secret information, while Pennsylvania’s rule requires disclosure of trade names and concentration to regulators and provides that the information is available to the public upon request.
Wastewater disposal remains a contentious issue, since there are issues associated with each method of disposal (discharge to public treatment works, storage pits, or underground injection wells). In response to accidental releases of oil, drilling wastewater, and other fluids, in 2012, North Dakota regulators issued new rules banning the storage of liquid waste from oil and gas drilling operations in open pits. Ohio’s Department of Natural Resources also recently addressed concerns about underground injection well disposal by passing new rules to allow the Department to request well safety tests. The Department has now lifted a moratorium on underground injection well permitting that was instituted in response to a number of earthquakes in 2011.
Particularly in light of the ongoing studies in several states, it is clear that state regulations will continue to evolve as more information about the science becomes available. Private sector research will also continue to be influential. To date, studies of varying quality on both ends of the spectrum have received significant attention and influenced the conversation.
Local Regulation: Questionable Validity?
While anti-fracking forces have waged war at all levels of government, they have had measurable success in getting strict measures passed at the local level. About 300 municipalities in 16 states have passed measures limiting fracking or banning it outright. Not all of these measures will have a practical effect, since some were passed in areas without shale gas reserves, but they are nonetheless symbolic of generalized public concern.
The legal status of municipal controls depends on the state and the context. The authority of Pennsylvania municipalities to control fracking remains in question pending the state’s appeal of its invalidated legislation. A similar state-local battle is playing out in Colorado. In July 2012, the town of Longmont adopted an “operating agreement” with a drilling company that included a ban on fracking in residential neighborhoods. The state quickly sued to invalidate the agreement as preempted under state law. More recently, during the November 6 election, Longmont passed a ballot initiative banning fracking altogether. Governor John Hickenlooper has since announced that the state will not challenge the ban. Meanwhile, the Colorado Oil and Gas Association has filed suit in state court seeking to overturn it.
While the New York Department of Environmental Conservation continues to sit on its draft rules, the state appears to have embraced local initiatives to some extent. The current draft rules require industry to analyze the applicability of local ordinances when applying for state permits. Meanwhile, more than 170 New York municipalities have instituted controls, with more being enacted seemingly every day. State courts have upheld bans imposed by the towns of Dryden and Middlefield. In a more recent case, the New York Supreme Court held that a municipality may not enact a moratorium on fracking without providing evidence to support “a justification, based on the safety and health of the community, for the banning of gas exploration, storage and extraction.” The reach of this decision will likely be limited, since the court also agreed with the Dryden and Middlefield cases that such measures are not preempted by state law.
Cities have traditionally retained authority over land use and zoning, and fracking opponents argue that retaining such control is essential to protecting citizens from unwanted industrial uses and risks to health and the environment. Depending on where they are in force, however, such laws have the potential to limit opportunities for developing the shale gas industry in an economical manner and could significantly limit states’ ability to promote economic development on a statewide basis.
Federal Regulation: First Forays
While President Obama has stated that the U.S. should welcome fracking, he has also cited a need for clear guidelines. Indeed, a number of administrative developments are already under way. Perhaps most significant, on May 11, 2012, the Bureau of Land Management (BLM) proposed a comprehensive rule to govern hydraulic fracturing on federal lands. The rule would require public disclosure of fracking chemicals, add guidelines for well casing, and require submission of wastewater management plans prior to drilling. The BLM received almost 60,000 comments during the comment period, which closed on Sept. 10. While environmental groups contend that the proposal does not go far enough, industry and some state government representatives maintain that the rules would be unduly burdensome and duplicative of state rules. More recently, on Nov. 30, 43 congressmen sent a letter to the BLM expressing concern that the proposed rule would interfere with the ability of state water rights holders to contract with operators to supply water for hydraulic fracturing. The BLM recently announced that it will not finalize the new rules until 2013. Since then, a coalition of Republican attorneys general and governors have asked the Obama administration to withdraw the proposed rule.
The BLM regulations will be especially important because they are likely to be a model for at least some of the states, and perhaps localities. Since most shale gas development in the near future will occur on nonfederal lands, a series of other developments will also be significant. Within the past year, the EPA has taken a number of steps to address concerns about air, water, and toxic substances.
On Aug. 16, the EPA implemented new Clean Air Act requirements for the oil and gas industries. A number of petitions challenging the rule have already been filed by stakeholders on both sides. Most important for fracking, the EPA’s New Source Performance Standards (NSPS) provide for reducing emissions of volatile organic compounds from onshore gas wells. After January 1, 2015, all wells must employ a technology called “green completions,” which involves the use of equipment to separate gas and liquid hydrocarbons in flowback. The new rule also includes changes to the National Emissions Standards for Hazardous Air Pollutants (NESHAP), which generally apply to “major sources” of HAPs. Although EPA officials have stated that they are unaware of any natural gas wells currently being regulated as major sources, the amendments changed the definition of “associated equipment” to include emissions from all storage vessels and glycol dehydrators (used to remove water from gas). The EPA’s regulatory impact analysis did not identify how many oil and natural gas well sites would be considered major sources under the new definition. Finally, oil and natural gas facilities that emit more than 25,000 metric tons of carbon dioxide equivalent must now report their annual emissions to the EPA under the Greenhouse Gas Reporting Rule. This requirement could apply with particular force to natural gas wells that emit large amounts of methane. Industry reactions to these rules have been mixed. While the American Petroleum Institute praised the EPA’s decision to allow a phase-in period for green completions, the Western Energy Alliance objected that the costs outweigh the benefits.
The EPA is also working to address water issues. One set of actions concerns drinking water. In addition to its Dimock, Penn., study, the EPA is conducting a generalized review of potential drinking water impacts that could be the basis for significant regulatory initiatives. A first progress report was released on December 21, 2012. While extensive, the progress report simply outlines the study that is being conducted and does not come to any substantive conclusions. A draft report of the study results is expected to be released for public comment and peer review in 2014. The EPA has been widely criticized for another study of alleged groundwater contamination in Pavillion, Wyo., allegedly due to fracking chemicals. In response to criticism, the EPA announced in March 2012 that it would delay peer review while it gathers more data. Since then, it has released additional sampling data. On the enforcement front, in March the EPA withdrew its administrative order against Range Resources for alleged contamination of drinking water wells near its Texas drilling operations. The withdrawal has been viewed as backpedaling by the federal agency on a questionable exercise of authority under the Safe Drinking Water Act.
A second set of actions concerns wastewater disposal. In May 2012, the EPA issued draft guidance regarding disposal of diesel-containing fracking fluids in underground injection wells. The draft guidance covers the definition of diesel fuels, permitting and well-construction issues, well operation and monitoring, and well closure. The EPA’s Underground Injection Control National Working Group is also evaluating whether use of Class II wells to dispose of fracking wastewater has the potential to cause earthquakes. Finally, the EPA has announced its intention to develop pretreatment standards under the Clean Water Act for wastewater sent to public treatment works.
Consistent with the current administration’s efforts to expand its use of authority under the Toxic Substances Control Act, the EPA has begun a rulemaking process to obtain data on chemical substances used in hydraulic fracturing. According to the agency, the rule is directed at obtaining aggregate information about the fracking chemicals industry and is intended to complement state requirements that apply on a well-by-well basis. Although the EPA had previously announced its intention to release an Advance Notice of Proposed Rulemaking by the end of 2012, the agency has now changed the projected date of release to May 2013.
Now that the presidential election is over, a major question is how large a role fracking will be allowed to play in the Obama administration’s “all of the above” energy policy. This question takes on additional significance in light of the president’s announced renewed commitment to address climate change in the aftermath of Superstorm Sandy, since the capacity of shale gas to serve as a “bridge fuel” is still hotly debated. Natural gas is a less greenhouse gas–intensive fuel than coal and oil. On the other hand, the methane that is released from gas wellheads is itself a significant greenhouse gas. The administration’s approach may therefore depend partly on the success of the EPA’s new green completions requirement. Although it is clear the administration supports development of U.S. natural gas reserves, there will certainly be more battles fought about what role the federal government should play in supplementing state rules.
—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.