On June 9, King & Spalding hosted its quarterly Energy Forum, focusing on the rapidly evolving field of shale energy production. Hydraulic fracturing technology has opened enormous new shale energy resources, creating a multitude of opportunities and potential risks as industry and regulators adapt to the evolving shale gas industry.

Brief Overview of Shale Exploration

John Connor, President of GSI Environmental, Inc., provided an overview of the technical aspects of shale energy exploration and production. Shale formations sometimes harbor trapped natural gas within their finely-grained structures. Traditional vertical drilling, which depends on permeable pools of resources for production, has difficulty producing gas from low-porosity deposits such as shale. But early in the last decade, operators discovered a new use for horizontal drilling combined with hydraulic fracturing (or “fracking”). Horizontal drilling uses a lateral wellbore that traverses thousands of feet across a reservoir. Fracking involves the high-pressure injection of a mixture of sand, water, and other substances into the well to prop open seams—or fractures—in the targeted layer and extract the hydrocarbons. The combination of these processes has led to a boom of shale gas production.

The main challenge presented is the amount of “flowback” water, a highly saline solution that flows out of the well after injection. Because some of the largest shale gas deposits are in the northeast, the oil and gas infrastructure that can handle large amounts of flowback water is simply not present. In fact, while Texas has more than 12,000 saltwater reinjection wells, there are only 14 such wells in Pennsylvania and New York combined. As a result, efforts in the northeast have focused on recycling flowback water. Texas, with its significant shale gas sources in the Barnett, Haynesville, and Eagle Ford shale deposits, has focused on reinjection.

State and Federal Reactions Through Regulation

The rapid rise of shale drilling has posed a challenge for state and federal regulators. Leslie Savage of the Texas Railroad Commission stated that a major state issue is the disclosure of chemicals contained in fracturing fluids. In April 2011, operators began disclosing the chemicals, volume of water, and location of particular wells on the web site www.fracfocus.org. Although the program is currently voluntary for Texas wells, by July 2012, use of FracFocus for chemical disclosure will become mandatory throughout the state of Texas.

Moreover, on the federal stage, Robert Ehrlich, Senior Counsel at King & Spalding and a former Maryland governor, explained that a battle is ongoing over whether the federal government will assert itself in the regulation of shale gas. At the crux of this debate are safe drinking water and energy security, which are significant issues of national concern. Education also will play a major role in the regulatory arena because many shale gas deposits are in eastern states, which have not seen significant oil and gas development in over a century.

Cynthia Stroman, a partner at King & Spalding, echoed Governor Ehrlich's depiction of an uncertain regulatory landscape. She stressed that the EPA is currently studying the potential impacts of hydraulic fracturing on drinking water resources, with a final report due in 2014. At the same time, the EPA is looking at issuing guidance regarding possible regulations through its authority under the Clean Water Act and Clean Air Act.

An Uncertain Litigation Playing Field

The shifting regulatory landscape mirrors uncertainty in shale energy litigation. King & Spalding partner Brannon Robertson discussed his review of two dozen shale drilling related cases in the U.S. The lawsuits generally feature restricted areas of impact and have many similarities to well blowout and casing failure actions, with a broad array of materials claimed to have caused property damage.

In sum, shale deposits have quickly become a primary source of domestic energy production. The speed with which shale exploration has occurred will continue to present positive opportunities to oil and gas operators. But these opportunities also present real risks as long as the uncertain regulatory and legal landscape continues.