Fracking Insider Readers:  We are pleased to bring you Volume 5 of our State Regulatory Roundup.   As we explained in earlier volumes, we designed the Roundup to provide quick overviews on state regulatory activity.  If you have any questions on any of these summaries, please do not hesitate to ask.

Hydraulic Fracturing:  State Roundup Volume 5

California – On October 16, 2012, a number of environmental groups (Center for Biological Diversity, Earthworks, the Environmental Working Group, and Sierra Club) filed suit in Alameda County Superior Court seeking to enjoin the California Department of Conservation’s Division of Oil, Gas, and Geothermal Resources (DOGGR) from issuing permit approvals for drilling operations.  The groups contend that the DOGGR is compelled by the California Environmental Quality Act (CEQA) to conduct environmental impact reports (EIRs) to fully assess the environmental impacts of oil and gas drilling, including the impact of methane emissions on global climate change.

Drilling operators have used hydraulic fracturing in California’s oil shale plays well before the technology took off in Eastern shale gas plays.   This lawsuit comes on the heels of recently stalled legislative efforts to increase regulation of hydraulic fracturing.

California – The South Coast Air Quality Management District (SCAQMD) announced that it will undertake a rulemaking to regulate hydraulic fracturing activities within the District.   In doing so, it is moving ahead of CEQA initiatives designed to increase hydraulic fracturing regulation statewide.   In its staff directive, the SCAQMD requested called for rules requiring the disclosure of fracking chemicals, and a review of air emissions rules applicable to oil and gas operations. 

Colorado – The Colorado Oil and Gas Conservation Commission (COGCC) released a formal draft of the groundwater monitoring and well setback standards it intends to apply to oil and gas operations within the state.   The setback rule would establish four separate setback requirements depending on the occupancy and use of the zone.  High occupancy zones would require specific approval from COGCC.  The depth of the remaining setbacks vary from 350 feet to 750 feet.

The proposed groundwater monitoring rule increases both the frequency of sampling and the range of wells required to be sampled.   Drilling operators would be required to conduct baseline sampling of two groundwater sources within a mile of the drill site before operations, and then again 18 months and five years after sampling. 

The proposed rules are controversial from the start, as some environmental groups are demanding 2000 foot setbacks and further increases in monitoring.   In a state that is working through some high profile municipal preemption issues, the controversy is sure to continue. 

Louisiana and Maryland – On October 5, 2012, the U.S. Department of Energy agreed to hear a Sierra Club challenge to a liquid natural gas (LNG) export license for a Louisiana facility owned by a subsidiary of Cheniere Energy Corp.   The Cameron Parish facility currently exists as an LNG import facility.  The permit would permit the redevelopment of the facility as an export terminal.

In its Louisiana petition, the Sierra Club stated that, in addition to FERC review of the project, DOE is required to undertake a full NEPA analysis that examines all the potential upstream impacts of the hydraulic fracturing and drilling process that produce the natural gas for export. 

In Maryland, the Sierra Club is similarly opposing the conversion of a Calvert County LNG import facility to an LNG export terminal.   Dominion Resources, Inc., the owner of the facility, and Sierra Club argued in Calvert County Circuit Court over whether the agreement first establishing the facility permits its use as an export facility.  As in the Louisiana petition, Sierra Club is concerned about the impact export can have on hydraulic fracturing operations – not about the actual export.

Sierra Club’s position in these matters is not surprising as it stands in opposition to all hydrocarbon development.  Their methods, however, are interesting.  Sierra Club seems to recognize that natural gas development is moving forward, and will continue to move forward as long as there are accessible markets.  By fighting export facilities and transmission lines, Sierra Club is trying to strand natural gas resources and sever wells from markets. 

New York – On October 2, 2012, the Supreme Court in Broome County vacated Binghamton’s hydraulic fracturing ban on the grounds that it was an impermissible moratorium, as opposed to a local exercise of police power. The judge was persuaded by the fact that the ban was designed to sunset in two years.   Such a provision undermined the premise that hydraulic fracturing  was such a threat to human health as to warrant protection under the city’s police powers. 

Local bans and moratoria (and litigation thereon) are common in New York as the state struggles to make a decision with respect to the state-wide moratorium on hydraulic fracturing.   The New York Department of Environmental Conservation (DEC) was supposed to issue new drilling permits and guidelines by November 29, 2012.   However, Governor Cuomo recently decided to conduct another round of public health reviews on hydraulic fracturing that will significantly delay any opportunity to lift the statewide moratorium.

North Dakota – On September 20, 2012, FERC approved an 80 mile pipeline to carry Bakkan shale gas to markets.  In particular, Alliance Pipeline, Inc. will take associated gas from oil shale fields in North Dakota and Montana that is currently being flared and ship it to a Tioga, North Dakota processing plant that will then ship it to Chicago.   Without pipelines such as this, gas from the Bakkan was considered stranded from downstream markets.  By tying Bakkan gas to markets, operators can significantly reduce flaring – a practice that facing increased regulatory scrutiny.

Ohio – On October 1, 2012, Ohio joined the ranks of states with municipalities imposing local bans on hydraulic fracturing and underground injection.   Yellow Springs, a small town east of Dayton, issued the ban despite the fact it is not in a play that is likely to be developed.   The Yellow Springs’ ban is in direct conflict with Ohio’s new natural gas extraction law passed this summer.   It is unclear how, or whether, Ohio Department of Natural Resources will respond given the ban is mostly symbolic.

Pennsylvania – On October 18th, 2012, the Pennsylvania Supreme Court heard arguments on the municipal preemption portion of Act 13.  Act 13, which was signed into law this past spring, provides updated regulations for natural gas operations in the state and establishes impact fees.  Also, in order to avoid creating a patchwork of conflicting local regulations and bans, Act 13 included a language preempting municipal ordinances. 

Environmental groups and townships challenged the preemption portions of the ban and, in July, the Pennsylvania Commonwealth Court sided with the environmental groups and struck the ban.   The Commonwealth decision was immediately appealed by the state. 

Both sides are asking the Court to interpret Huntley & Huntley Inc. v. Borough Council of Borough of Oakmont, wherein the Supreme Court upheld a local ban on drilling.   The Townships argued that the decision is directly on point and binding.  The state argued that the Court in Huntley only allowed the ban in the absence of state-level regulation.   Now that state-level regulation is in place, the court’s prior justification for upholding the ban disappears. 

The state will need to convince four of the six justices of their argument.  The Supreme Court is down one justice due to a conduct investigation, leave three Republicans and three Democrats.   A 3-3 split would not overturn the Commonwealth Court decision.

Meanwhile, a less controversial aspect of Act 13 came to fruition.   Pennsylvania announced it will start sending out more than $204 million dollars in impact fees collected from the oil and gas industry.   $108 million will go to towns and counties where oil and gas operations are occurring, and $72 million will be shared among the rest of the state. 

Pennsylvania – On October 5, 2012, the Pennsylvania Department of Environmental Protection finalized guidance delineating how various types of equipment should be aggregated as a single air permitted source.  Environmental groups argue for broad aggregation of equipment across long distances so that the collective emissions trigger “major source” status and the stringent regulations therefrom.   Pennsylvania’s guidance states that equipment needs to be aggregated if they are within a quarter-mile of one another and under common ownership.  The U.S. Environmental Protection Agency (EPA) alleges that Pennsylvania’s aggregation guidance conflicts with federal guidance that should be followed as part of Pennsylvania’s State Implementation Plan.   Pennsylvania responded to EPA that the Agency’s guidance should not be construed as a rule, and that guidance, by definition, is instructive – not dispositive. 

Pennsylvania – Earlier this month, Pennsylvania Governor Tom Corbett (R) signed the Indigenous Mineral Resources Incentives Development Act, which allows for increased oil and gas leasing on state-owned land.   Previously, leasing of state-land was restricted to the state Department of Conservation and Natural Resources.  This Act allow state  schools and prisons to similarly lease subsurface rights.  Payments and royalties for such rights are divided among the host agencies and with the general treasury.  

Wyoming – In late September, the Wyoming Occupational Safety & Health Commission adopted amendments its rules for workers at oil and gas drilling sites.   The rules require, among other things increased use of fire-retardant clothing when in close proximity to the well bore and increased use of emergency shutdown procedures and devices for diesel engines on drilling sites.   The changes come on the heels of three worker fatalities in the Wyoming oil and gas industry and a worker safety culture that has been heavily criticized.