The exploration and development of shale formations in the Rocky Mountains, Texas and Pennsylvania has captured the nation's attention, as citizens and governments respond to the expanding production of natural resources in their communities. At the centre of this public debate is hydraulic fracturing, a stimulation treatment routinely performed on oil and gas wells in low-permeability reservoirs, such as shale formations. Hydraulic fracturing typically entails the pumping of specially engineered fluids into the rock formation to open up fractures within the reservoir. Typically, these fluids are then pumped back out of the well before production can begin. In some instances, the resultant waste is then injected into subsurface, saline environments known as injection wells.
While state and federal agencies continue to debate various methods of regulating the use of hydraulic fracturing and injection wells, many legal disputes are already working their way through the courts. This update highlights the recent decision of the Texas Supreme Court in Railroad Commission of Texas v Texas Citizens for a Safe Future and Clean Water, which hinged on the proper interpretation of the phrase 'public interest' when considering an application for a permit to operate an injection well.(1)
The Barnett Shale is a geological formation located beneath several counties in northern Texas. Many wells in the Barnett Shale require hydraulic fracture stimulation in order to increase production of natural gas, and many developers use injection wells to dispose of the resulting waste. Under the Texas Water Code, a company that seeks to convert an existing well into a disposal well for oil and gas waste must obtain a permit from the Railroad Commission of Texas.(2) The commission may grant an application for a permit if it finds that:
- use or installation of the injection well is in the public interest;
- use or installation of the injection well will not endanger or injure any oil, gas or other mineral formation;
- with proper safeguards, both ground and surface fresh water can be adequately protected from pollution; and
- the applicant has made a satisfactory showing of financial responsibility if required by Section 27.073 of the code.(3)
Pioneer Exploration, Ltd applied for a permit to convert an existing well into an injection well for the disposal of oil and gas waste from the Barnett Shale. Organised as Texas Citizens for a Safe Future and Clean Water, county residents sought to prevent the proposed well at an administrative hearing before the commission.
In addition to concerns over the well's environmental soundness, Texas Citizens presented arguments and evidence related to traffic safety issues. The residents argued that the large trucks used to haul waste water to and from the well site would damage nearby roads and pose a threat to residents in the area; thus, the well would not serve the 'public interest' under Section 27.051(b)(1).
The commission approved Pioneer's application, finding the well to be in the public interest, as it would provide much-needed disposal capacity in the expanding Barnett Shale field, thereby increasing resource recovery and preventing waste.
The trial court confirmed the commission's order, but the court of appeals reversed the decision, holding that the commission had abused its discretion by interpreting the public interest inquiry too narrowly. The court remanded the case to the commission to "reconsider its public interest determination, using a broader definition of 'the public interest', which includes public-safety concerns where evidence of such concerns has been presented".(4) The commission and Pioneer petitioned the Texas Supreme Court for review of the holding on the public interest issue.
The Texas Supreme Court, in an opinion by Justice Guzman, framed the issue as follows:
"The crux of the dispute… is whether the term 'public interest' in section 27.051(b) of the Water Code is a broad, open-ended term, encompassing any conceivable subject potentially affecting the public, or a more narrow term that does not include a subsidiary issue like traffic safety but is limited to matters related to oil and gas production."(5)
The court approached the commission's construction of the term using the 'serious consideration' analysis, which will uphold an agency's interpretation of a statute which it is charged with enforcing, "so long as the construction is reasonable and does not contradict the plain language of the statute".(6)
Texas Citizens asserted two arguments in favour of a broad definition of the term 'public interest':
- The term is inherently amorphous and unlimited, encompassing all possible factors that might affect the public; and
- Since other factors in the section require the commission to consider matters pertaining to the production of oil and gas and the prevention of water pollution, it must follow that the 'public interest' factor is intended to encompass something else.(7)
The court found the broad definition and the commission's interpretation to have merit. "It is precisely when a statutory term is subject to multiple understandings that we should defer to an agency's reasonable interpretation," stated the court.(8)
To determine whether the commission's interpretation was reasonable, the court examined the statute at issue. The Injection Well Act, now codified in Section 27 of the Texas Water Code, distinguishes between wells used to dispose of industrial or municipal waste and wells used to dispose of oil and gas waste.
While the Railroad Commission has jurisdiction over injection wells used for oil and gas waste, the Texas Commission for Environmental Quality (TCEQ) has jurisdiction over other types of injection well.
The court noted that this distinction is important, as the statute differs as to the factors which each agency must consider in granting an injection well permit. Both provisions require the agencies to determine whether the use of the well is in the public interest, but the TCEQ must also find that an applicant for a well that is not located in an industrial area has made a reasonable effort to ensure that any burden of the well on public roadways will be minimised or mitigated.(9) The court will "read the statute as a whole and interpret it to give effect to every part".(10)
Had the legislature intended the commission and the TCEQ to entertain traffic-related evidence in their public interest inquiries, it would not have expressly required the TCEQ to consider a well's impact on traffic in certain situations. Moreover, the court found the commission's interpretation of the term 'public interest' to agree with the surrounding statutory scheme, which exclusively concerns matters related to the production of oil and gas.(11)
Texas Citizens argued that the commission's public interest inquiry was unrelated to its administrative expertise and therefore the court should afford no deference to the agency's interpretation of the statute. The court dismissed this argument, noting that the commission interpreted the term 'public interest' in such a way as to ensure that it will only consider matters related to its purpose - namely, matters related to oil and gas production. The court agreed with the commission that the agency's longstanding construction of the statute "is particularly worthy of our deference".(12)
The court concluded:
"When, as here, a statutory scheme is subject to multiple interpretations, we must uphold the enforcing agency's construction if it is reasonable and in harmony with the statute… Under the plain terms of the Act, we conclude the Commission's construction of 'public interest' as a narrow term that does not include traffic-safety considerations is reasonable and in alignment with the statute's meaning."(13)
The Supreme Court reversed the court of appeals judgment and found for the commission and Pioneer in accordance with the trial court's original decision.(14)
Chief Justice Jefferson, joined by two other justices, concurred in the court's judgment, but wrote separately to state that the statute's language and context precluded the commission from considering traffic-safety factors as part of its public interest inquiry. As the Chief Justice found the Texas Water Code to be unambiguous, there was no need for a 'serious consideration' analysis to decide whether to defer to the commission's interpretation.(15)
The decision by the Texas Supreme Court will have an immediate impact on injection well permitting decisions in Texas and the Barnett Shale reservoir. On at least one previous occasion, the commission may have weighed public-safety factors as part of its 'public interest' inquiry in order to comply with the then-binding judgment of the Austin Court of Appeals.(16) In future, the commission can return to its focus on matters related to the production of oil and gas when reviewing injection well permit applications.
The legal framework surrounding the development of shale reservoirs continues to evolve. Several states now require the disclosure of chemicals used in hydraulic fracturing.(17) The federal government is increasingly scrutinising the industry and discussions about the federal regulation of hydraulic fracturing are ongoing.(18) The future governance and regulation of oil and gas production in shale formations will remain closely watched by the many companies and individuals involved in this growing industry.
For further information on this topic please contact Stephen C Dillard, Barclay R Nicholson or Kadian Blanson at Fulbright & Jaworski LLP by telephone (+1 212 318 3000), fax (+1 212 318 3400) or email ([email protected], [email protected] or [email protected]).
(1) RR Comm'n of Tex v Texas Citizens for a Safe Future and Clean Water, 08-0497 (Tex March 11 2011), available at www.supreme.courts.state.tx.us/historical/2011/mar/080497.pdf.
(2) Texas Water Code Section 27.031.
(3) Texas Water Code Section 27.051(b).
(4) RR Comm'n of Tex v Texas Citizens for a Safe Future and Clean Water, 254 SW3d 492, 503 (Tex App —Austin 2007, pet granted).
(5) RR Comm'n of Tex v Texas Citizens, 08-0497, slip op at 6.
(6) Id at 8 (quoting First Am Title Ins Co v Combs, 258 SW3d 627, 632 (Tex 2008)).
(9) Id at 9-10 (citing Texas Water Code Section 27.051(a)(6)).
(10) Id at 14 (quoting City of San Antonio v City of Boerne, 111 SW3d 22, 25 (Tex 2003)).
(15) RR Comm'n of Tex v Texas Citizens for a Safe Future and Clean Water, No 08-0497 (Tex March 11 2011), concurring op. available at http://www.supreme.courts.state.tx.us/historical/2011/mar/080497c.pdf.
(16) Berkley v RR Comm'n of Tex, 282 SW3d 240 (Tex App —Amarillo 2009, no pet).
(17) For example, Col Code Regs Section 404-1 (Rule 205(c) Access to Records) (April 1 2009) (requiring companies to maintain a well-by-well chemical inventory for the life of the well plus five years); 30-3 Wyo Code R Sections 1(a), 12 (requiring mandatory reporting of the chemicals used in hydraulic fracturing).
(18) For example, Letter to the Honorable Ken Salazar, Secretary of the Department of the Interior, from Joe Barton and Fred Upton, Ranking Members of the House Subcommittee on Energy and Environment (December 3 2010) (requesting information regarding the department and the administration's intentions to develop regulatory policies for hydraulic fracturing).