This is a quarterly update to our coverage on laws, regulation, and policy affecting hydraulic fracturing (“fracking”) operations. Our last installment was issued September 2, 2014, and may be found here. This latest update details developments in state and local bans and restrictions (notably the New York State ban adopted at the end of 2014); state and federal regulation (including emerging regulation of methane emissions); state efforts to evaluate and regulate seismic risk; and litigation and regulatory developments regarding constituent toxicity. In many instances, information provided in our previous updates has been referenced below in order to provide context, and we encourage readers to refer to previous installments for a more in-depth analysis.
BANS ON FRACKING OPERATIONS
As state and local authorities continue to implement complete or partial bans or moratoriums, several actions have been brought in state courts to challenge such restrictions. These actions are generally grounded in claims of preemption (based on state-wide regulatory schemes) or constitutional insufficiency (based on either infringement of contract understandings or on takings without due process). Several of these cases have reached state high courts, impacting public policy decisions by elected officials. Industry commentators predict that the next wave of lawsuits will be brought on behalf of private landowners claiming that fracking bans result in a regulatory taking of the landowners’ mineral rights and that compensation must be paid by the government as a result of such taking.
A. New York
On December 17, 2014, New York Governor Andrew Cuomo announced a ban on fracking throughout New York State. His determination was reached following the New York State Department of Health’s (“DOH”) report: Public Health Review of High Volume Hydraulic Fracturing for Shale Gas Development. DOH was asked by the New York Department of Environmental Conservation (“DEC”) to prepare the report after the DEC’s release in July 2011 of a revised draft, Supplemental Generic Environmental Impact Statement for High Volume Hydraulic Fracturing (“SGEIS”), which recommended that limited fracking operations be allowed, subject to stringent safeguards. The DOH report, however, expressed concern about significant uncertainties with regard to health outcomes and environmental impacts associated with fracking, and concluded that “until the science provides sufficient information to determine the level of risk to public health from [fracking] and whether the risks can be adequately managed, [fracking] should not proceed in New York State.” The DEC is expected to release a final SGEIS in early 2015 that will reflect the DOH’s recommendation to ban fracking in New York.
The decision to ban fracking throughout New York follows a 5-2 decision in June 2014 by the New York Court of Appeals (New York’s highest court) upholding bans by the towns of Dryden and Middlefield under home-rule doctrine, finding that the New York Oil, Gas, and Solution Mining Law (“OGSML”)1 does not preempt such home-rule authority. (See OMM September 2, 2014, Client Alert, Current Developments Affecting Hydraulic Fracturing Operations.) On October 16, 2014, the New York Court of Appeals denied a motion for rehearing filed by the trustee for Norse Energy Corporation, USA.
On November 4, 2014, fracking bans were passed by voters in Mendocino County and San Benito County (no fracking has yet been conducted in either county). A similar ban was rejected by voters in Santa Barbara County, where 20 conventional wells are located. In response to the ban passed by voters in San Benito County, Citadel Exploration, Inc. indicated its intent to seek over $1 billion in damages for financial losses in connection with its mineral rights and infrastructure located in San Benito County. A similar suit was filed against the City of Compton (Los Angeles County), which later withdrew its ban.
Bans continue to be under consideration in a number of other California jurisdictions, including a March 3, 2015, City of La Habra Heights ballot initiative to ban fracking at any new oil or gas wells within the city limits, while Butte County is set to vote on a similar ban in November 2016. It is likely that further litigation will be initiated claiming that such local bans are preempted by state law, especially in light of SB 4, which authorized the establishment of stringent new fracking regulations approved by California’s Office of Administrative Law and set to take effect on July 1, 2015. (See OMM January 8, 2014, Client Alert, California Releases Hydraulic Fracturing Proposed Regulations.)
On December 3, 2014, an environmental group filed a complaint in a California federal district court claiming that the Bureau of Safety and Environmental Enforcement (“BSEE”) violated the National Environmental Policy Act2 by approving 51 permit applications for offshore well stimulation along California’s coastline without requiring applicants to submit environmental impact statements.
On October 16, 2014, the Federal Bureau of Land Management (“BLM”) stated it will take approximately two years to complete an environmental impact statement regarding the potential effects of fracking on federal land in California. The environmental impact statement must be completed prior to the sale of any new fracking leases by BLM, and is the result of a July 2014 settlement with environmental groups whereby BLM agreed to conduct an impact study of the environmental risks of fracking on federal lands in California.3
C. Other State Developments
On December 17, 2014, the North Carolina Rules Review Commission approved the vast majority of the 126 new rules for oil and gas development issued by the Mining and Energy Commission (“MEC”) after the Energy Modernization Act, which was signed into law on June 4, 2014, lifted a state moratorium on fracking—a moratorium which had been in effect since 2012. The Rules also criminalize (as a misdemeanor offense) failure to disclose fracking chemicals under state requirements. Shale-gas exploration permits are expected to be issued in early 2015. On January 5, 2015, an environmental group filed a complaint in state court seeking to invalidate the new fracking rules, claiming that the formation of the MEC in 2012 violated the separation of powers provisions of the state constitution due to the Legislature’s power to appoint 8 of the 12 MEC members, resulting in the commandeering of executive branch authority.4
On December 4, 2014, a local activist group filed a class-action lawsuit5 in Ohio state court, seeking to enforce the voter-approved “Community Bill of Rights” fracking restrictions passed in 2012 for Broadview Heights, Ohio. The group asserts that any state preemption of the City Charter violates the residents’ self-governance rights under the state constitution. The class action was filed in response to a lawsuit filed on June 10, 2014, by two energy companies claiming that the restrictions on oil and gas wells implemented in Broadview Heights are preempted by state law; the companies’ suit was supported by the Ohio Attorney General in an amicus brief filed on November 12, 2014.6 A case pending before Ohio’s Supreme Court (see case docket here) will likely impact this case and test the primacy of state law over local fracking restrictions.
On November 4, 2014, residents of Denton, Texas, voted to ban fracking within city limits, making Denton the first city in Texas to implement such a ban. Denton already requires a 1,200-foot setback from homes and schools, but the approval of the initiative results in an outright ban on fracking operations. On November 5, 2014, the Texas Oil and Gas Association filed a lawsuit against the City of Denton claiming that the ban is preempted by state law and exceeds the authority of home rule.7
On October 15, 2014, Mora County, New Mexico, commissioners voted 2–1 to keep in place an ordinance passed on April 29, 2013, banning fracking within the county limits, making it the first county in the United States to ban fracking. Many commentators predict that the ban will be repealed in February 2015 when a new commissioner who supports lifting the ban takes office, although two lawsuits are currently pending in federal court.8
FEDERAL REGULATORY DEVELOPMENTS
A. Control of Methane Emissions
On December 18, 2014, the Environmental Protection Agency (“EPA”) announced that it will delay, until the summer of 2015, a proposed rulemaking on control of fugitive emissions following the release of five technical white papers in April 2014, including a white paper on compressors, which are identified as increasing GHG emissions during production, processing, transmission, and storage of oil and natural gas from wells, related equipment, and pipelines. (See OMM September 2, 2014, Client Alert, Current Developments Affecting Hydraulic Fracturing Operations.) The original rulemaking deadline had been December 21, 2014. The American Petroleum Institute has indicated its support for the rulemaking, provided that it does not extend beyond control of well emissions.9
On November 25, 2014, EPA published its Greenhouse Gas Reporting Rule in the Federal Register. The Rule became effective on January 1, 2015, and includes “changes to certain calculation methods, amendments to certain monitoring and data reporting requirements, clarification of certain terms and definitions, and provisions for asserting confidentiality as to submissions.” The final rule also includes requirements for reporting of greenhouse gas emissions from completions and workovers of oil wells using fracking.
B. Other Federal Developments
On January 8, 2015, an environmental group filed a complaint in federal court against BSEE, claiming that the agency violated the Freedom of Information Act by failing to provide information with regards to fracking operations in the Gulf of Mexico. A press releasepublished by the Center for Biological Diversity states that the group is seeking “permits, reports, emails and other documents related to the federal government's approval of oil and gas fracking operations in the Gulf of Mexico.”
On November 19, 2014, the EPA submitted to OMB a proposed rule that would set effluent limitations on fracking wastewater sent to publicly owned water treatment works (“POTWs”).10The EPA announced it hoped to publish the rule for comment in early 2015, as amendments to the Effluent Limitations, Guidelines and Standards for the Oil and Gas Extraction Category under 40 CFR Part 435.
On September 8, 2014, a federal judge dismissed a lawsuit filed against BLM by an environmental group seeking to challenge the agency’s decision to propose fracking leases in Nevada. The court found that, although BLM conducted a lease sale, because no leases have been issued and BLM retains discretion regarding whether to issue a lease, no final agency action occurred and thus the petition by the group is premature.
As discussed in depth in previous updates, in a related development, BLM has been developing best practices for fracking on federal and tribal lands, which are expected to be released in early 2015. The BLM published a proposed rule in May 2012 and a revised proposal in May 2013 that requires (i) public disclosure of chemicals used in fracking operations, (ii) confirmation that wells used in fracking operations meet appropriate construction standards, and (iii) plans for managing flowback waters from fracking operations. The revised proposed rule also provides certain trade-secret protections to operators. On August 26, 2014 the White House Office of Budget Management received the final rule for review. The Independent Petroleum Association of America has stated that it expects to file a lawsuit challenging the final rules.
A number of recent studies conclude that fracking operations are a significant factor in seismic events. On December 18, 2014, a report was released by the British Columbia Oil and Gas Commission, finding that 231 seismic events ranging from 2.2 to 3.8 in magnitude, recorded between August 2013 and October 2014 in Montney Trend, Canada, a 29,850-square-kilometer underground siltstone formation in British Columbia, can be attributed to gas operations in the area, with 38 seismic events induced by wastewater disposal and 193 seismic events by fracking operations. The report states that seven of the seismic events were “felt events,” although considered “weak to light.” On January 6, 2015, a study published by the Bulletin of the Seismological Society of America links a series of five earthquakes (ranging from 2.1 to 3.0 on the Richter scale) in Poland Township, Ohio, to fracking operations that activated a previously unknown fault.11 On the other hand, a study published on September 16, 2014 by two U.S. Geological Survey (“USGS”) scientists found that earthquakes which have occurred in the Raton Basin area of Colorado and New Mexico are not caused by fracking but rather by the deep injection of wastewater that is produced from methane production in coal bed fields. In January 2015, EPA announced plans to issue a report providing information on management of induced seismicity due to underground injection activities, including through fracking operations.12
On October 28, 2014, the Texas Railroad Commission (“TRRC”) adopted final rules to amend regulations for fracking injection wells. These rules give the TRRC the power to “modify, suspend, or terminate a disposal well permit,” including a permit for saltwater or other oil and gas waste disposal, “for just cause after notice and opportunity for hearing,” including “injection that is likely to be or determined to be contributing to seismic activity.” Under the regulations, disposal-well permit applicants will be required to provide information from the USGS regarding the locations of historical seismic events and may be required to provide information “such as logs, geologic cross-sections, pressure front boundary calculations, and/or structure maps.” In a 24-hour period between January 6, 2015, and January 7, 2015, nine earthquakes, ranging in magnitude from 1.6 to 3.6, occurred in North Texas, creating heightened public concern among local residents and several commentators regarding the potential impact that fracking operations might have had on the increased occurrences of earthquakes in the area.
In other jurisdictions, studies are underway to formulate a proposal of seismic regulations. For example, on September 4, 2014, Oklahoma Governor Mary Fallin announced the creation of the Coordinating Council on Seismic Activity, established in order to connect researchers, legislators, members of the public sector, environmental groups, and the energy industry to discuss and address concerns about seismic activity in connection with fracking operations. The governor stated that, although Oklahoma has always had earthquakes, more have occurred recently than occurred several decades ago, and it is important to study the issue and have sound science to inform decisions made in both the public and private sectors. The formation of the council follows growing public concern about the connection between fracking and seismic activity, including a magnitude 5.0 earthquake and a magnitude 5.7 earthquake that occurred near Prague, Oklahoma. The Oklahoma Corporation Commission has adopted the “traffic light” system, under which a 10-kilometer circle is designated around the epicenter of a magnitude 4.0 or higher earthquake; depending on a determination of whether a correlation exists between the earthquake and any disposal wells within this designated area, certain wells may be subject to heightened scrutiny and, in some cases, shut down pending further investigation. In related developments, between October 11 and October 15, 2014, the USGS sent two seismographs to each of two cities in Oklahoma that have active crude oil operations following the occurrence of 10 earthquakes in these areas over the previous two-week period, including a magnitude 4.0 earthquake on October 7, 2014, followed by a magnitude 4.3 earthquake on October 10, 2014.13
Several states have experienced increasing drought conditions, which have resulted in the possibility of new water use regulations for fracking operations. During a severe drought in 2011, several water districts in Texas placed some water use restrictions on fracking operations, including the city of Barnett Shale, Texas, which banned the use of city water for fracking.14 Although no water-specific legislation has passed in California, water issues were raised in relation to the various bans and moratoriums, including the passage of SB 4 (seediscussion above).
On November 5, 2014, a report released by Bluefield Research found that due to the risks facing water supplies throughout the U.S., tighter regulations emerging in several states, and the rising costs of disposal, water treatment and reuse in the fracking industry is expected to increase substantially. In its press release, Bluefield Research states that the U.S. fracking industry “consumes over 1 billion barrels of water annually, producing 450–500 million barrels of contaminated water for disposal, with only about 14 percent treated and re-used.” The report finds that the U.S. fracking industry spent $6.38 billion on water management—including treatment, supply, transport, storage, and disposal—in 2014, and that the wastewater treatment market for fracking will grow from $138 million in 2014 to $357 million in 2020.
On September 2, 2014, the World Resources Institute released a report finding that the lack of water availability could inhibit the development of shale through fracking. The executive summary indicates that “38 percent of shale resources are in areas that are either arid or under high to extremely high levels of water stress; 19 percent are in areas of high or extremely high seasonal variability; and 15 percent are in locations exposed to high or extremely high drought severity.” The report also finds that 386 million people live in these areas, and fracking competes with the demand for fresh water by other industries, including irrigated agriculture, which is the largest user of water in 40 percent of the shale plays. The report relies on an interactive mapping tool that is meant to “help companies, investors, governments and other users understand where and how water risks and opportunities are emerging worldwide.”
REGULATORY DEVELOPMENTS IN CANADA
In November 2014, legislation to ban “high volume hydraulic fracturing” in Nova Scotia passed the legislature and became law. Environmental groups criticized the bill, stating that it contains an exemption that allows fracking for testing and research purposes without defining those purposes; provides the Energy Minister the power to end the ban without community consent; does not define the term “high volume hydraulic fracturing” within the bill, but instead the term will be defined in subsequent regulations; and prevents fracking only in shale rock formations, leaving open the possibility of fracking in different types of sand or rock.
On December 18, 2014, legislation was introduced to the Legislative Assembly of New Brunswick that would amend the Oil & Natural Gas Act, SNB 1976, c 0-2.1. If passed, the bill will result in a moratorium on fracking in the province of New Brunswick. The stated purpose of the bill is to halt fracking operations until several conditions are met to the government’s satisfaction, including the availability of credible information on the environmental, health, and safety impacts resulting from fracking; the establishment of regulations to address health and safety concerns; the development of a royalty structure to ensure residents reap maximum benefits from fracking in the province; and the creation of a plan to mitigate impacts on public infrastructure, including issues related to waste disposal.15 Fracking moratoriums are currently in place in Quebec, Newfoundland and Labrador, and Yukon.
In November 2014, the Alberta government released a plan titled “Our Water, Our Future: A Plan for Action” based on approximately 30 community meetings and other input from citizens, outlining 20 short-term actions and five long-term actions intended to meet Alberta’s goal of maintaining (i) safe and secure drinking water; (ii) healthy aquatic ecosystems; and (iii) reliable and quality-assured water supplies for a sustainable economy. The plan includes a section dedicated to the protection of groundwater from oil and gas development, including fracking. The plan states that in early 2015, the government will (a) expand the water conservation and allocation policy presently in place for oilfield injection to include water conservation measures for fracking; and (b) with input from stakeholders, develop and implement science-based standards for baseline water well testing near fracking operations.
On November 7, 2014, an Alberta court ruled that a woman’s claim against the government for negligence, nuisance, strict liability, and trespass—claiming that fracking operations caused contamination to well water and a fresh-water aquifer near her home—may proceed. The plaintiff claims that the Alberta government failed to properly investigate and remediate the contamination caused by the fracking operations and is seeking approximately $30 million in damages. The Alberta government announced in December 2014 that it would not appeal the ruling. A response to the plaintiff’s complaint is expected in early 2015.
On October 29, 2014, Transport Canada announced the adoption of two recommendations and two advisories issued by the Transportation Safety Board of Canada (i) requiring implementation of hand-brake application standards and additional physical defenses to secure trains; (ii) increasing oversight, including more frequent audits and information-sharing with municipalities; (iii) conducting research on crude oil properties, behavior, and hazards, and launching a targeted inspection campaign to verify the classification of rail shipments; and (iv) requiring certain railways to submit training plans to Transport Canada for review and conduct an audit to determine training gaps. The additional safety standards follow the July 2014 Transport Canada release of proposed rail safety regulations to amend the Transportation of Dangerous Goods Regulations, including the reduction of speed limits in highly populated areas or near drinking water sources, the implementation of emergency response plans, and the requiring of greater protection for DOT-111 rail cars. (See OMM September 2, 2014, Client Alert, Current Developments Affecting Hydraulic Fracturing Operations.)
TOXICITY RISK AND REPORTING REQUIREMENTS
On January 7, 2015, a coalition of environmental groups filed suit against the EPA for failing to require the energy industry to disclose information about toxic constituents of fracking fluids pursuant to the Emergency Planning and Community Right-to-Know Act of 1986 (“EPCRA”). EPCRA requires annual disclosure of such information for facilities that produce or store designated hazardous materials in quantities greater than 25,000 lbs. and 10,000 lbs., respectively, through the federal Toxic Release Inventory database. Other energy-related industries, such as coal mining operations and electric utilities, are generally required to report such information under EPCRA. According to the complaint, plaintiffs submitted a petition to the EPA on October 24, 2012, requesting that EPA initiate rulemaking to add gas extraction industries to the list of those industries required to report releases of toxic chemicals to the Toxic Release Inventory. The plaintiffs seek a judgment declaring that the EPA’s failure to respond to the plaintiffs’ request is a violation of the Administrative Procedure Act, and are seeking a court order requiring EPA to respond within sixty days. As noted in prior updates, federal reporting has not been required to date in favor of voluntary disclosure via FracFocus, a database jointly established by DOE and a consortium of trade associations.
In the meantime, state and local governments continue to advance more stringent reporting requirements as well as technical requirements for fracking operations. On January 9, 2015, proposed regulations on fracking in Maryland were published, addressing findings of a report released by the Maryland Department of the Environment and Department of Natural Resources in November 2014, that set forth best practices to be followed by all gas drillers in the state, including (i) the submission of a Comprehensive Gas Development Plan; (ii) location and setback restrictions; (iii) the submission of an environmental assessment with a permit to drill a well, including two years of baseline monitoring in the vicinity of the well pad; (iv) performance standards and minimum requirements, including the submission of detailed plans for construction and operation of the well; (v) sediment and erosion control requirements; (vi) waste management requirements; (vii) chemical disclosure requirements; and (viii) site closure requirements. If the proposed regulations take effect, violators of the rules will be “guilty of a misdemeanor, and, upon conviction … subject to a fine not exceeding $10,000 per day for each day of the offense, not to exceed a total fine of $50,000.” The comment period on the proposed regulations concludes on February 9, 2015. The report, which was the basis for the proposed regulations and the result of a three-year study, concludes that, “provided all the recommended best practices are followed and the State is able to rigorously monitor and enforce compliance, the risks of Marcellus Shale development [in Maryland] can be managed to an acceptable level.” The report concedes that, although best practices and “rigorous monitoring, inspection and enforcement can reduce the risks to acceptable levels,” some of the best management practices proposed have yet to be tested, and “some risks will remain, as is the case with all industrial activities.” Some commentators have noted that the implementation of the proposed regulations may face opposition from the incoming governor, set to take office on January 21, 2015.
According to an unreleased draft regulation by the Virginia Department of Mines, Minerals and Energy, fracking operators will be required to disclose all ingredients, including trade secrets, to FracFocus. The regulations have yet to be publicly released, but are reported to require (i) pre-drilling testing of groundwater close to the drilling platforms, (ii) at least one post-drilling groundwater test, (iii) pressure testing of production well casings, and (iv) the use of only enclosed waste pits.16
The Michigan Department of Environmental Quality announced that new rules regulating fracking in the state will likely be released in early 2015 and will reflect responses to thousands of comments the agency received after it initially released rules in October 2013 that proposed new permitting, monitoring, and reporting requirements, which were seen as inadequate by many environmental groups.
On November 6, 2014, the Illinois General Assembly’s Joint Committee on Administrative Rules granted final approval to the Illinois Department of Natural Resources’ final rules on fracking (“Final Rules”), opening the door to implementation of the Hydraulic Fracturing Regulatory Act (“HFRA”), which strengthens public disclosure requirements in connection with water volume and fracking chemicals used during fracking operations, clarifies rules protecting the ability of the public to comment during the fracking permit approval and modification process, provides for additional safety and oversight in connection with fracking wells, significantly increases enforcement penalties for administrative violations under the HFRA, expands rules to cover additional fracking technologies, and increases regulations on the use of flaring. On November 10, 2014, several environmental groups filed suit against the Illinois Department of Natural Resources, claiming that the Final Rules are invalid and should be barred from going into effect because the agency failed to follow proper rulemaking procedures.17 On November 21, 2014, the court denied the group’s motion for a preliminary injunction, finding that the plaintiffs failed to meet their burden of proof as to irreparable harm.18
On October 3, 2014, Anadarko Petroleum Corp. and EOG Resources Inc. entered into separate agreements19 with New York Attorney General Eric T. Schneiderman to publicly disclose information on the financial effects of regulation, litigation, and environmental impacts of their fracking operations, including disclosure through each company’s SEC filings.
On October 2, 2014, the U.S. Department of Health and Human Services released the 13th Report on Carcinogens, which is a congressionally mandated document that identifies and discusses agents, substances, mixtures, or exposure circumstances that may pose a hazard to human health by virtue of their carcinogenicity. Of the 243 listings in the report, three were newly added from previous reports, including cumene, a chemical used in fracking operations, which the report deemed “reasonably anticipated to be a human carcinogen.” According to the substance profile, cumene is “an alkylated benzene that exists at room temperature as a volatile, colorless liquid with a sharp, penetrating aromatic or gasoline-like odor … [and] is a flammable liquid that is stable under normal conditions but may become unstable at high temperatures and pressures.” Some environmental groups have pointed to the addition of cumene to the Report on Carcinogens as an additional reason for strict federal oversight of fracking operations.
Effective October 1, 2014, Baker Hughes Inc. announced that it will achieve 100 percent disclosure of all the chemicals used in its fracking operations. The development follows an April 2014 announcement by the company that it would voluntarily disclose, through FracFocus, the chemical ingredients in the fluids used during the company’s fracking operations. Currently, over 200 operators voluntarily disclose the ingredients used in their fracking fluids through FracFocus. According to the company, “Baker Hughes is implementing a new format … [by] providing complete lists of the products and chemical ingredients used.”
On September 25, 2014 a report titled “Communities at Risk: Frac Sand Mining in the Upper Midwest,” published by a coalition of advocacy groups, was released, outlining key health and environmental risks arising from the mining of sand used in fracking operations. The report addresses issues related to (i) water, including supply and runoff concerns; (ii) air quality, including the potential health impacts of dust particles; and (iii) economics, including loss of real estate value and damage to infrastructure. The report does not offer specific recommendations, but instead poses seven questions that the authors propose should be answered by government agencies prior to regulating or allowing frac sand mining and processing operations to take place.
On September 15, 2014, a study published in the Proceedings of the National Academy of Sciences suggests that “where fugitive gas contamination occurs, well integrity problems are most likely associated with casing or cementing issues” and not horizontal drilling or fracking, which some claim has provided an outlet to link deep shale formations directly to surface aquifers. The authors recommend that more research be performed to determine whether the large volumes of water and high pressures required for horizontal drilling or fracking influence well integrity, and conclude that “optimizing well integrity is a critical, feasible, and cost-effective way to reduce problems with drinking-water contamination and to alleviate public concerns accompanying shale-gas extraction.”