This client alert is part of an ongoing series by DLA Piper attorneys on the legal, regulatory and policy issues related to hydraulic fracturing and shale gas production in the US.S. and internationally.
On March 20, 2015, the US Department of the Interior’s Bureau of Land Management (BLM) released final regulations governing oil and gas drilling utilizing hydraulic fracturing on lands owned by the federal government and Native American tribes. According to the BLM, the regulations, which have been in the works since November 2010 and been subject to repeated delays, represent “commonsense standards,” that “will improve safety and help protect groundwater by updating requirements for well-bore integrity, wastewater disposal and public disclosure of chemicals.”
The new federal regulations met with a mixed reaction from environmentalists and were roundly criticized by representatives of the oil and gas industry, with two industry groups immediately challenging the rule in federal district court in Wyoming. Unless blocked by court or congressional action, the new regulations should go into effect on June 24.
The fracking boom that has taken place over the last decade has made the U.S. the world’s largest producer of both oil and gas. States have jurisdiction over oil and gas drilling on private and state-owned lands, where the vast majority of fracking is done in the US. Drilling on federal lands accounts for only 11 percent of the natural gas consumed in the US and 5 percent of the oil. The BLM says there are more than 100,000 oil and gas wells on federally managed lands, and over 90 percent of the wells currently being drilled use hydraulic fracturing.
According to US Secretary of the Interior Sally Jewell, a trained mechanical engineer who worked for Mobil on fracking operations in Oklahoma in the late 1970s and early 1980s long before joining the Obama Administration in 2013, the prior federal well-drilling regulations, which are more than 30 years old and pre-date the current common use of hydraulic fracturing, “simply have not kept pace with the technical complexities of today hydraulic fracturing operations.”
The new regulations “will allow for the continued responsible development of our federal oil and gas resources,” said Interior Secretary Jewell, as the federal government continues “to offer millions of acres of public lands for convention and renewable energy production.”
As fracking has increased dramatically in the US, opponents have argued that the technique, which involves injecting large volumes of water, sand and some chemicals into the ground to break up rocks around oil and gas deposits, could contaminate groundwater supplies. Over the past several years, however, a consensus has begun to develop among academia, industry and state regulators that it is not the hydraulic fracturing process itself but rather faulty construction of wells in contravention of industry standards – i.e., drilling through an overlying aquifer and casing, cementing and completing the well – that is responsible for the limited number of associated water supply contamination events.
Accordingly, the federal regulations include several provisions designed to ensure wellbore integrity that are largely consistent with existing industry best practices and already mandated by some state regulations. The new regulations would require any operator planning to conduct hydraulic fracturing on federal lands to do the following:
- Submit detailed information about wellbore geology, the location of faults and fractures, the depths of all usable water, estimated volume of fluid to be used, and estimated direction and length of fractures
- Design and implement a casing and cementing program that follows best practices and meets performance standards to protect and isolate usable water, defined generally as those waters containing less than 10,000 parts per million of total dissolved solids (TDS)
- Monitor cementing operations during well construction
- Take remedial action if there are indications of inadequate cementing, and demonstrate to the BLM that the remedial action was successful
- Perform a successful mechanical integrity test (MIT) prior to the hydraulic fracturing operation and
- Monitor annulus pressure during a hydraulic fracturing operation.
Aside from these well construction and operation requirements, operators must disclose the chemicals used in hydraulic fracturing to the BLM through the website FracFocus.org, which was formed by industry and intergovernmental groups in 2011 and allows users to gather data on thousands of wells throughout the country. And with very limited exceptions, wastewater fluids from fracking operations must now be stored in rigid enclosed, covered or netted and screened above-ground storage tanks, as opposed to lined pits.
States or tribes with fracking rules equal to or more protective than the new federal regulations will be able to obtain a variance that allows use of their regulations in lieu of the federal rules.
Disputes over costs of implementing the new regulations
The government and some industry representatives differed significantly over how much complying with the new regulations would cost. BLM Director Neil Kornze put the cost of compliance at $11,400 per well, or less than one-quarter of one percent of the average $7 million cost to drill a typical shale well. A study for the Western Energy Alliance (WEA), one of the two industry groups that immediately brought suit to invalidate the regulations, estimated that the rules would add $97,000 to the cost of each well.
The real story on compliance costs is likely more complex than either BLM or the groups challenging the federal regulations are asserting. Industry reports indicate that drillers have already slashed spending an average of 37 percent and dismissed thousands of workers as a result of the recent plunge in energy prices – attributed by some to an energy glut created by the shale gas boom itself. Oil prices have dropped 54 percent and gas fell by 36 percent in the past year. The Wall Street Journal noted that for smaller companies scraping by with low prices, the costs of complying with more rules could add to their woes, while many of the larger companies have already implemented the practices mandated by the federal regulations and thus less likely to be impacted.
The Independent Petroleum Association of America (IPAA) and the WEA have filed suit asking the federal district court in Wyoming to block implementation of the new regulations. The complaint characterizes BLM’s rules as “a reaction to unsubstantiated concerns” and requests that the regulations be set aside because they lack a factual, scientific, or engineering foundation. Attorneys representing the IPAA and the WEA in their lawsuit asserted that the regulation does not have a “commensurate environmental benefit with the economic costs.”
“States have been successfully regulating fracking for decades, including on federal lands, with no incident that necessitates redundant federal regulation,” said Tim Wigley of the WEA.
Erik Milito of the American Petroleum Institute agreed that “a duplicative layer of new federal regulation is unnecessary” and he urged “the BLM to work carefully with the states to minimize costs and delays created by the new rule to ensure that public lands can still be a source of job creation and economic growth.”
The fact that the new regulations will continue to allow federal lands to be used in fracking operations at all drew criticism from some environmentalists, who would have preferred an outright ban on the practice similar to that put in place by New York State late last year.
“These rules put the interests of big oil and gas above people’s health, and America’s natural heritage,” said Amy Mall of the Natural Resources Defense Council. “The bottom line is the rule fails to protect the nation’s public lands – home to our last wild places, and sources of drinking water for millions of people.”
Other environmentalist groups were more supportive of the Obama Administration’s action, however. “The updated regulations released today by Secretary Jewell represents important progress in holding the oil and gas industry accountable for the full economic and environmental costs of extracting dirty fuels from our public lands,” said Dan Chu of the Sierra Club. “When fully enforced, this new rule will reduce the harm caused by fracking to our land, water and health near communities where leasing has already occurred.”
At the congressional level, Republicans have already introduced legislation that would strip the federal government of any authority to regulate fracking and leave the issue in the hands of the states.
“This Administration never misses a chance to appease radical environmentalists,” said House Speaker John Boehner. Boehner stated that the rule would create “needless costs and headaches” for energy producers because it amounts to regulation of “a process that is already properly regulated” by the states.
Boehner’s statements notwithstanding, given the current political landscape, the prospects for congressional blockage of the new federal regulations appear extremely remote.
Potential net positive for fracking
Ultimately, the new federal regulations can be interpreted as a net positive for hydraulic fracturing because the Obama Administration has implicitly if not explicitly concluded that with proper controls in place hydraulic fracturing can be done in a manner that is protective of environmental health and safety.
The Obama Administration’s position also calls into further question the scientific and factual basis of New York State’s recent prohibition on hydraulic fracturing, which was ostensibly based on public health concerns.