The spring and summer of 2011 have witnessed substantial regulatory movement across multiple states in favor of greater natural gas development through the use of hydraulic fracturing1 — most notably in New York State, which is preparing to release its moratorium on more than 80 percent of its portion of the Marcellus Shale to development in 2012. However, even generally pro-development regulations have tended to reflect a certain lingering public unease with hydraulic fracturing through an increased focus on chemical disclosure requirements and through restrictions on drilling in sensitive areas. Moreover, at the federal level, the United States Environmental Protection Agency (EPA) continues to develop regulations in areas where it has jurisdiction, such as air quality and diesel usage in fracturing fluids. As a result, the regulatory arena for hydraulic fracturing, though increasingly favorable, continues to present challenges requiring active engagement by industry.
New York Supplemental Generic Environmental Impact Statement
On July 8, 2011, the New York State Department of Environmental Conservation (NYSDEC) released its long-awaited preliminary reviset draft Supplemental Generic Environmental Impact Statement (2011 Draft SGEIS), which addresses the permit conditions to be required for horizontal drilling and high-volume hydraulic fracturing in New York including in the Marcellus Shale. Under New York’s State Environmental Quality Review Act (SEQRA), NYSDEC may authorize the use of a generic environmental impact statement (GEIS) to assess the environmental impacts of separate actions having similar types of impacts. NYSDEC issued a GEIS in 1992 (1992 GEIS), which satisfies SEQRA environmental review with respect to certain commonly expected impacts from oil and gas drilling. However, NYSDEC determined in 2008 that some aspects of horizontal drilling and hydraulic fracturing, such as the volume of water to be consumed and the possibility of drilling within the New York City watershed, warranted further review and a supplement to the 1992 GEIS to address these issues.2
While the 2011 Draft SGEIS may be substantially complete in that it reflects more than 13,000 public comments received in response to the previous September 2009 draft, the SGEIS will not be finalized until after another 60-day public comment period. That period is expected to begin in fall 2011 after incorporation of certain forthcoming socioeconomic and community impact analyses. In addition, in response to industry requests for greater clarity and predictability, NYSDEC Commissioner Joe Martens announced at a July 1, 2011 press conference3 that NYSDEC will issue “belts and suspenders” rules in 2012 codifying the findings of the final SGEIS; however, he stressed that the rules process would not delay the commencement of New York shale development as NYSDEC would begin processing permit applications as soon as the SGEIS is finalized.
Overall, the 2011 Draft SGEIS is a marked improvement over the September 2009 draft, providing greater clarity and investment certainty on a number of issues of importance to the oil and gas industry:
- Locations Where Hydraulic Fracturing Is to Be Prohibited: Prior to NYSDEC’s release of the 2011 Draft SGEIS, it was uncertain as to whether and, if so, when the moratorium on hydraulic fracturing in New York would be lifted.4 As it stands currently, New York is operating under an executive moratorium until the completion of the SGEIS.5 However, the 2011 Draft SGEIS lists seven locations where hydraulic fracturing will continue to be prohibited after the SGEIS becomes final and the moratorium lifted — most prominently within 4,000 feet of the New York City and Syracuse watersheds and within 2,000 feet of any public water supply wells or reservoirs.
- Projects Requiring Site-Specific SEQRA Approvals: Applications to drill oil and gas wells in New York require review under SEQRA. One of the key benefits of the 1992 GEIS is that it allows a permit applicant, where the project conditions conform with the thresholds and conditions of the 1992 GEIS, to satisfy SEQRA. As a result, NYSDEC or the applicant would not need to conduct the expensive and time-consuming project-specific SEQRA review process. Similarly, under the current draft of the SGEIS, oil and gas developers would be able to receive an application to conduct horizontal drilling and hydraulic fracturing without a project-specific SEQRA review, with certain exclusions such as where the top of a targeted fracturing zone is shallower than 2,000 feet, where water is withdrawn from ponds or lakes, and where well pads are sited within 500 feet of tributaries to public drinking water supplies.6
- Well-Casing Requirements: To mitigate the risk of gas migration into aquifers, the 2011 Draft SGEIS goes beyond proposals in the September 2009 draft to require a third “intermediate” layer of cement casing (unless supporting site-specific documentation to waive the requirement is presented), in addition to other casing quality control mandates.7
- Fracturing Fluid Disclosure: In preparing the 2011 Draft SGEIS, NYSDEC received the compositional information for 235 fracturing fluid additives (containing 322 unique chemicals) from six service companies and 15 chemical suppliers.8 In the 2011 Draft SGEIS, NYSDEC proposes to require the submittal of a Material Safety Data Sheet (MSDS) for every additive product proposed for use in hydraulic fracturing, including a list of the identities, properties and effects of any hazardous chemical constituents within each proposed additive. Applicants also would have to submit an evaluation as to the availability of alternatives to the proposed additive that pose less risk to water resources and the environment, as well as submit well completion reports providing the total volumes of materials utilized. Importantly, NYSDEC considers MSDSs to be public information ineligible for protection from disclosure under state trade secret laws. Thus, as currently drafted, all fracturing additive product names and their associated MSDSs would be posted on an individual well basis on a public website.9
- Discounting of Concerns Raised by Fracturing Opponents: Aside from drilling within the New York City and Syracuse watersheds, the 2011 Draft SGEIS concludes that many potential impacts from hydraulic fracturing are far less significant than argued by opponents. For example, in response to concerns that hydraulic fracturing would consume excessive or harmful amounts of fresh water, the 2011 Draft SGEIS estimates that the total volume of water to be withdrawn for hydraulic fracturing will generally be “relatively low” and “modest” in comparison to existing overall levels of water use.10 Moreover, evaluating claims that hydraulic fracturing induces seismic activity, the 2011 Draft SGEIS concludes that the possibility of fluids injected during the process reaching a nearby fault and triggering a seismic event is “remote.”11
The key points above — and the 2011 Draft SGEIS as a whole — can be viewed as a full endorsement in favor of oil and gas development in much of New York. And as demonstrated when a bill to further extend the moratorium was voted down in committee on April 12, 2011 (S.B. 425), a majority of New York’s state legislature does not appear to be opposed to hydraulic fracturing.12 It must nevertheless be emphasized, however, that the 2011 Draft SGEIS arrives at a time when hydraulic fracturing is subject to intense scrutiny, if not outright hostility, by various state citizens’ groups and some governmental officials — as most recently exhibited by New York State Attorney General, Eric Schneiderman, who, on May 31, 2011, filed suit in the Eastern District of New York against the US Army Corps of Engineers (representing the Delaware River Basin Commission, or DRBC), contending that under the National Environmental Policy Act (NEPA) the DRBC should not be drafting its own rules13 in support of hydraulic fracturing without preparing an environmental impact statement.14
Moreover, as currently conceived, the 2011 Draft SGEIS allows for potential increased interference by local opposition groups by, among other things, requiring applicants to give notice to local governments of proposed hydraulic fracturing in their areas and calling for the creation of an electronic notification system to alert people of hydraulic fracturing activity.15 While NYSDEC asserts that it has exclusive authority to supersede local government authority relative to well siting, the current phrasing of the 2011 Draft SGEIS indicates that NYSDEC is prepared to give significant weight to local land planning documents and — through its early notification system — increased opportunities for opposition groups to mobilize.16 Thus, it would be prudent for oil and gas developers to continue to solicit local support for development projects, notwithstanding NYSDEC’s authority and support for hydraulic fracturing as a general matter.
On June 17, 2011, Governor Rick Perry signed into law HB 3328, requiring well operators to publicly disclose chemicals used in hydraulic fracturing.17 HB 3328’s passage makes Texas — home to the Barnett and Haynesville Shales, two of the most productive shale gas plays in the United States — one of the first states to require public disclosure of fracturing fluid constituents.18 While the Texas Railroad Commission (TRC) has until July 1, 2012 to adopt regulations implementing most of the disclosure provisions,19 HB 3328 provides for two forms of disclosure. First, operators must release to the TRC and post on Fracfocus.org a list of all chemicals for which the US Occupational Safety and Health Administration requires a MSDS.20 Second, operators must also provide the TRC with a list of all non-MSDS chemical ingredients intentionally used for fracking purposes. Going a step further than New York’s 2011 Draft SGEIS, the TRC would then make this non-MSDS list available on a publicly-accessible website.
In response to concerns regarding the exposure of proprietary information, H.B. 3328 does not require disclosure of specific chemical quantities or concentrations. In addition, the law includes provisions which allow operators to claim that certain chemicals are protected by trade secret laws. In such cases, the State’s Public Information Act21 will govern disclosure procedures and only government entities and landowners directly affected by an operator’s hydraulic fracturing activities would be able to challenge a trade secret claim.22
EPA Regulations Governing Diesel Fuel in Hydraulic Fracturing
The Underground Injection Control (UIC) Program of the Safe Drinking Water Act (SDWA) regulates the underground injection of fluids for storage or disposal.23 Under SDWA, EPA sets minimum standards that each state must implement through its own UIC Program. Congress, however, specifically excluded hydraulic fracturing — except for the underground injection of “diesel fuels” — from regulation under the UIC Program in the 2005 Energy Policy Act,24 leaving hydraulic fracturing largely exempt25 from federal regulation and, instead, subject mostly to oversight by state, local and inter-state authorities.
Notwithstanding the hydraulic fracturing UIC exclusion (and the diesel fuel carve-out from that exclusion), EPA entered into a Memorandum of Agreement with several companies in the fracturing industry in which the companies agreed to abandon the practice of adding diesel to fracturing fluids.26 Thus, when Democratic members of the US House Committee on Energy and Commerce alleged in an open January 31, 2011 letter that hydraulic fracturing services companies had injected millions of gallons of diesel fuel underground without obtaining permits as required by the SDWA,27 EPA Administrator Lisa Jackson responded in April with an announcement that EPA would “clarify” rules that apply to the use of diesel fuel in hydraulic fracturing.28
Since that time, EPA has held six “technical webinars” (the final webinar occurred on June 15, 2011) with industry representatives, environmental groups, tribal agencies and other governmental entities to solicit input regarding permit requirements for fracturing activities. In addition, EPA accepted written comments until June 29, 2011. While EPA expects to issue an initial draft of permitting guidance later this summer and allow for another public comment period in the fall, one of the key questions — and likely areas of future contention — that will need to be addressed is what constitutes “diesel fuel.” Potential answers have varied from “[p]etroleum-derived fuel that could be used in a diesel engine” to “[a]ny amount of diesel fuel (whether mixed with or applied to other constituents being injected).”29 In addition, EPA may seize this “diesel” opportunity to issue requirements regarding reporting, well siting and construction, permit duration, monitoring and financial assurance.30
Other Recent Developments
- Presidential Guidance Expected This Fall: Following up a Department of Interior forum in November 2010 that focused on how to expand domestic oil and gas production,31 President Obama recently charged Secretary of Energy Steven Chu with leading a seven-person panel32 to study fracturing methodology and issue recommendations by mid-August 2011 as to how to immediately improve the safety of hydraulic fracturing (DOE Fracking Taskforce). These recommendations would then serve as a form of “consensus recommended advice” for state and federal agencies by November 5, 2011.33 Importantly, however, while the panel will make findings regarding fracturing safety, its recommendations will not be binding on federal agencies or states.34
- Repeal of SDWA Hydraulic Fracturing Exemption Unlikely Near Term: Despite being defeated in 2009, the Fracturing Responsibility and Awareness of Chemicals Act (FRAC Act) — a bill that would, among other things, repeal the SDWA hydraulic fracturing exemption and require the disclosure of fracturing chemicals and, in emergency situations, proprietary chemical formulas — has been re-introduced in both the US House of Representatives and the Senate by Representative Diana DeGette (CO) and Senator Robert Casey (PA), respectively.35 However, as the FRAC Act does not appear to have any Republican co-sponsors at the present time, it appears highly unlikely that it will be passed in the current Congress, absent some high-profile event.36
- EPA Tightens Air Emission Standards for Oil & Gas Industry: On July 28, 2011, EPA issued draft regulations proposing the first federal air standards for wells that are hydraulically-fractured. The draft regulations would, among other things, require a 95 percent reduction in volatile organic compounds emitted from hydraulically-fractured wells through the use of existing gas capture technology and best practices. EPA anticipates that the value of the natural gas and condensate captured through the new regulations (estimated at $783 million) will exceed the combined annual implementation costs of approximately $754 million in 2015.37 The regulations are currently open for a 60-day public comment period and are currently expected to be finalized by mid-2012.
- California Assembly Passes Disclosure Bill: On June 1, 2011, the California State Assembly passed a bill that would require oil and gas companies to disclose to the State Division of Oil, Gas, and Geothermal Resources (DOGGR) for hydraulic fracturing operations the identity of chemicals injected, the source and volume of water used, and the fate of any radiological components injected (AB 591).38 DOGGR would then be mandated to publish online these chemical lists as well as the locations of specific wells where the chemicals were used.39 While similar to the Texas law discussed above, the California bill in its present form would go further in that there would be no exceptions to the disclosure requirement nor would there be a procedure to declare certain information a trade secret. The bill is currently being considered by the California Senate, where the appropriations committee has scheduled a hearing for August 15, 2011.
- SRBC Issues Additional Regulations for Natural Gas Development Projects: While the Susquehanna River Basin Commission (SRBC), another federal-state compact covering parts of New York, Pennsylvania and Maryland, has had regulations governing natural gas development projects in the Basin since early 2009,40 more recently on March 10, 2011, the SRBC issued a new policy designed to ease restrictions on the transfer of fracturing fluids between well pads in order to reduce water consumption by encouraging fluid reuse.41
- Pennsylvania Marcellus Shale Advisory Commission Issues Recommendations: By executive order dated March 8, 2011, Pennsylvania Governor Tom Corbett established a Marcellus Shale Advisory Commission to review existing and proposed state regulations and policies affecting natural gas development and issue recommendations as to ways to responsibly develop the Marcellus Shale.42 On July 22, 2011, the Commission issued a full report with 96 recommendations for, among other things, heightened bonding requirements for deep wells, increased well setback distances from bodies of water, and expanding the presumption of liability for a well operator where water quality is impaired within 2,500 feet of a well.43 Similarly, on July 1, 2011, New York announced the creation of its own panel to develop recommendations for the oversight of hydraulic fracturing and mitigation of environmental impacts.44
With the exception of the future EPA regulations governing the use of diesel fuel, the main thrust of hydraulic fracturing regulation — be it enthusiastic as in Texas or deliberative as in New York — appears to be remaining at the state and regional level. Further, the endorsement of oil and gas development by New York, which had previously appeared to be the largest state in opposition to hydraulic fracturing, in connection with the release of the 2011 SGEIS could potentially encourage other states to also support, or even compete for, such development. Nonetheless, much will depend on the perceived safety record of the oil and gas industry as well as the findings of EPA’s hydraulic fracturing study45 (initial research results expected by the end of 2012 with a final report in 2014). In addition, as demonstrated by actions in New York, Texas, California and other states, public disclosure of additives used in fracturing fluid could become a requirement in other states. Therefore, proponents of domestic oil and gas development should consider active participation in the public comment periods this fall for the New York 2011 Draft SGEIS, the DOE Fracking Taskforce recommendations, and EPA’s new regulations governing air emissions and the use of diesel fuel at hydraulic fracturing wells, as well as at government hearings and public fora generally.