US Bureau of Land Management seeks comment on revised proposed rule regarding hydraulic fracturing operations on federal and Tribal lands.

Introduction

The revised proposed rule retains the general regulatory framework and many elements of the proposed rule initially issued in May 2012 but includes several important changes reflecting the US Bureau of Land Management’s (BLM’s) consideration of issues raised by the public. BLM has indicated that the revised proposed rule is intended to maintain a strong level of environmental, health and safety protection while increasing flexibility for industry and reducing regulatory burden.

Public comments are due on or before June 24, 2013.1 Prior to its publication, members of Congress requested that the comment period be extended to 120 days; accordingly, BLM may possibly extend the comment period on the revised proposed rule.2

Background

On May 16, 2013, BLM issued a revised draft proposal for regulation of hydraulic fracturing on federal and Indian lands.3 BLM initially issued a proposed rule on May 11, 2012 to modify its existing hydraulic fracturing regulations,4 and requested public comments (Initial Proposed Rule).5 Upon review of over 177,000 public comments, BLM withdrew the Initial Proposed Rule6 and subsequently issued a Supplemental Notice of Proposed Rulemaking and Request for Comment (Revised Proposed Rule).

Major Changes in the Revised Proposed Rule

The existing BLM rules regulating natural gas production on public and Tribal lands were established in 1982 and last revised in 1988, many years before hydraulic fracturing technology was widely used. The proposed rule would expand the scope of BLM’s current regulation of oil and gas production on public and Tribal lands to address specific issues associated with hydraulic fracturing operations.

The Initial Proposed Rule addressed three primary goals: (1) the public disclosure of chemicals used in fracturing operations; (2) construction standards for fracturing operations; and (3) management of flowback water. Upon issuance, the proposed rule met heavy opposition from industry, who claimed that the rules were duplicative of state regulations already addressing these issues.

The Revised Proposed Rule retains the three primary objectives of the Initial Proposed Rule, but also contains several important changes to the way BLM intends to regulate these areas.7 Importantly, like the Initial Proposed Rule, the Revised Proposed Rule would not impose substantive restrictions on hydraulic fracturing operations (e.g., banning the use of certain chemicals). Rather, the Revised Proposed Rule would adopt procedural requirements that generally reflect requirements currently in place at the state level.

The key changes in the Revised Proposed Rule compared to the Initial Proposed Rule are:

Definitional Changes: The Initial Proposed Rule applied to “well stimulation” operations, which would have included any operation designed to increase the permeability of the reservoir rock. The Revised Proposed Rule would narrow the regulated activity to only “hydraulic fracturing” and “refracturing” activities and would not apply to acidizing, enhanced secondary recovery and tertiary recovery operations.8 Definitions of “hydraulic fracturing” and “refracturing” have been added to the Revised Proposed Rule.

The definition of “usable water” would also be revised to clarify that, for the purposes of the hydraulic fracturing regulations, usable water includes all underground sources of drinking water, zones actually used as water supply for industrial or agricultural purposes, and zones designated by a state or by a Tribe as needing isolation or protection from oil and gas operations, in addition to any zones containing water that does not exceed certain levels of total dissolved solids.9

Cementing and Construction Requirements: The Initial Proposed Rule would have required operators to submit a Cement Bond Log (CBL) to BLM prior to commencing fracturing in order to demonstrate the adequacy of the cementing.10 The Revised Proposed Rule would grant operators greater flexibility by allowing them to demonstrate the adequacy of the cementing by using an “equally effective” technology, (i.e., a technology that is at least as reliable as a CBL in detecting gaps or voids in the cement behind a casing and that meets the performance objective of validating the wellbore integrity and isolating zones of usable water.)11 A Cement Evaluation Log (CEL) would cover this range of technologies and would permit operators to use the logging tools that are most appropriate in a given situation.12

The Revised Proposed Rule would allow operators to submit a CEL monitoring report to BLM within 30 days after completion of hydraulic fracturing operations instead of requiring submission prior to commencing fracturing activities, as previously proposed.13 The Revised Proposed Rule would also allow for operators to submit a single CEL for a group of wells, or a “type well”.14 A type well is a well that can be used as a model for well completions on other wells in a field with sufficiently similar geologic characteristics in order to demonstrate that the operator’s engineering design and execution effectively isolate aquifers with usable water in the field.15 The type of operations conducted on the other covered wells, including drilling, cementing and hydraulic fracturing, must be sufficiently similar to those conducted on the model well.16 The operator would be required to monitor the wells covered by the type well.17

Finally, the Revised Proposed Rule would require that, if there is any indication of inadequate cementing, the operator must report it to BLM within 24 hours and confirm the report in writing within 48 hours.18 The operator would then run a CEL showing it has corrected the cementing error.19 At least 72 hours prior to commencing fracturing, the operator would be required to submit to BLM a certification documenting its CEL and indicating that it has corrected the inadequate cementing.20

Chemical Disclosure & Reporting: The Revised Proposed Rule would also make major changes to the Proposed Rule’s reporting requirements. The Initial Proposed Rule would have required operators to disclose to BLM all chemical additives used in the hydraulic fracturing operations, including the chemical composition of the chemicals used at the completion of fracturing.21 However, the Revised Proposed Rule would remove the requirement that operators disclose the chemical composition of flowback fluids.22

The Revised Proposed Rule would require operators to submit information within 30 days after fracturing or refracturing operations are complete to either BLM directly (via the operator’s Subsequent Report Sundry Notice) or through FracFocus.org, an industry-sponsored website currently used by many states with fracturing chemical disclosure requirements.23 To this end, BLM’s reporting requirements have been adjusted to mirror the existing reporting requirements for operators disclosing via FracFocus. The Revised Proposed Rule would require additional information regarding whether the well is on Federal or Tribal land and a certification that the information is correct and complies with applicable laws governing notice and permits.24 This provision should aid operators in those states that already use FracFocus as their reporting database of choice by reducing the number of reports that must be released to government entities. BLM has indicated that FracFocus.org is being revamped to increase searchability and to allow operators in states with existing disclosure requirements to submit a single report.

Flowback Fluid Storage: The Revised Proposed Rule does not change the requirement that operators submit to BLM a plan for managing and containing fluids recovered during the hydraulic fracturing process. As drafted, hydraulic fracturing flowback fluids may be stored either in tanks or lined pits.25 However, BLM is requesting additional comments regarding the costs and benefits of potentially requiring flowback water to be stored only in closed tanks.26 Currently, operators on federal or Tribal lands may use unlined pits if state law permits; requiring only closed tank storage could result in significant cost increases.27

Trade Secret Exemption: The Revised Proposed Rule gives greater trade secret protection to operators in connection with its chemical disclosures requirements. Under the Initial Proposed Rule, operators would have been required to submit to BLM all information about the chemicals used in the fracturing process, to segregate that information which they believed to be exempt from disclosure under Federal law as a “trade secret” and to justify the assertion of trade secret protection.28 The Revised Proposed Rule seeks to reduce the burdens on operators and BLM by instructing operators not to submit trade secret information in the disclosure of non-trade secret chemical information. Operators must still maintain the undisclosed information for six years, and must submit an affidavit affirming that the withheld information is entitled to trade secret protection.29 BLM would have the authority to require operators to submit the claimed trade secret information at its discretion, but the information would no longer be required as part of the initial filing under the Revised Proposed Rule.30

Coordination with States and Tribes: In an effort to avoid regulatory duplication, the Revised Proposed Rule would allow states and Indian Tribes to seek variances from the final BLM regulations. An approved variance could allow an operator’s compliance with a state or Tribal standard to be accepted as compliance with the Revised Proposed Rule.31 Requesting states and Indian Tribes would be required to demonstrate why the variance is needed and how the operator would satisfy the objectives of the regulations.32 The alternative state or Tribal regulation would be required to meet or exceed the objectives of the regulation, a decision which is entirely within BLM’s discretion.33 Importantly, the variance would apply only to operational activities, such as monitoring and testing technologies, and hydraulic fracturing operators would still be required to comply with BLM’s notice and approval procedures. While this may create a higher regulatory burden on some operators, it could facilitate compliance for others, as only one set of regulations would need to be met.

Tribal Issues

Between the Proposed Rule and the Revised Proposed Rule, BLM engaged in additional consultation with Tribes, including four consultation meetings with 81 Tribal members representing 27 Tribes.34 Additionally, BLM engaged in individual consultations with Tribal representatives, and held meetings at the National Congress of American Indians Conference in Lincoln, Nebraska.35 BLM pledges to continue consultation with other Tribal governments and individual Native Americans until issuing its final rule.36

In the Revised Proposed Rule, BLM declined to adopt a so-called “opt out” provision (requested by many Tribal commenters) that would have permitted Tribes to decide not to apply the rule on their lands.37 BLM explains that “the Department remains bound by specific statutes in which Congress has delegated specific authority and duties to the Department regarding the management and regulation of resources,”38 namely by the Indian Mineral Leasing Act and by the federal government’s trust obligations to Tribes.39 BLM also suggests that Tribes could enter into Tribal Energy Resource Agreements (TERAs) under the Indian Energy Development and Self-Determination Act,40 and/or pursue certain contracts under the Indian Self-Determination and Education Assistance Act of 1975, as an alternative means of enhancing autonomous control over energy development on Tribal lands.41 Whether or not the former offers a true avenue toward greater self-determination, however, given that TERAs have thus far not been utilized, remains to be seen.42

Additionally, as described above, BLM suggests that Tribes (and states) may seek variances that would render compliance with provisions of Tribal (or state) law or regulations sufficient in lieu of complying with BLM’s regulations, provided the alternative Tribal (or state) law or regulation is at least as effective as the BLM rule. However, BLM has also specifically called for comments on the practical enforcement challenges that might arise from such a regime.43

The Tribal aspects of BLM’s rule could be moot, however, if H.R. 1548 passes into law.44 The bill, among other things, would prohibit the US Department of Interior from regulating hydraulic fracturing on Tribal lands. The bill, introduced in the US House of Representatives on April 12, 2013, has passed through subcommittee hearings in late April, though it has not seen any additional subsequent action.45

 Conclusion

BLM indicates that the estimated compliance costs of the Revised Proposed Rule range from US$12 million to US$20 million per year, a marked difference from the Initial Proposed Rule’s estimates of US$37 million to US$44 million per year. BLM states that the “potential benefits of the rule are more challenging to monetize than the costs, but that does not mean that the rule is without benefits.”46 The Initial Revised Rule did monetize the potential benefits at US$12 million to US$50 million per year.

The proposed regulatory changes would add another layer of regulation to oil and gas operators on federal and Tribal lands and, if adopted, could impose significant new regulatory requirements and associated costs. The debate continues over the extent to which the Revised Proposed Rule overlaps with existing state regulations, and environmental groups have asserted that the Revised Proposed Rule does not go far enough to substantively regulate hydraulic fracturing operations.47 For example, environmental groups have questioned why disclosure should not happen before chemicals are used. Additionally, looming over the debate is an on-going US Environmental Protection Agency (EPA) study on groundwater impacts from fracturing operations, expected in 2014. Although the Revised Proposed Rule has been drafted to reduce the burden on industry, it reflects the Obama Administration’s larger effort to extend some amount of additional federal control over hydraulic fracturing activities on federal and Tribal lands.

Companies with operations on federal or Tribal lands should carefully evaluate the Revised Proposed Rule and consider the potential impact these changes could have on their operations. Interested parties may submit comments in response to BLM’s notice until June 24, 2013. Following the close of the comment period, BLM may next develop a final rule, a process that may not be completed until 2014. In developing final regulations, BLM must take into account the information obtained during the public comment period.