As Fracking Operations Are Poised to Take Place in Illinois, Lawmakers Are Contemplating How to Regulate and Tax the Industry

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[author: David Dolendi]

Most of central and southern Illinois sits above the New Albany Shale, a large geologic formation that is rich in natural gas deposits.  It is estimated that there is at least 11 trillion cubic feet, and as much as 86 trillion cubic feet, of natural gas within the New Albany Shale that could be recovered by hydraulic fracking.  To put this in perspective, the entire United States consumes approximately 22 trillion cubic feet of natural gas each year.  Illinois’ share of this yearly consumption is approximately 1 trillion cubic feet.

Currently, there is little or no hydraulic fracking activity taking place in Illinois.  However, Illinois residents and lawmakers believe that is all about to change.  The potential for natural gas exploration of the New Albany Shale has drawn the attention of oil and gas companies.  Over the past year, these companies have leased hundreds of thousands of acres of property from landowners in southeastern Illinois so they can conduct future fracking operations.  The Illinois Oil and Gas Association believes that oil and gas companies have already spent tens of millions, possibly as much as $100 million, on leases with landowners before the first well has been drilled.  Some of these leases include up to a 17.5 percent royalty payment to the landowner, which is believed to be higher than the typical industry standard of about 12 percent.

The rush to begin hydraulic fracking in Illinois has raised concerns with lawmakers who are now scrambling to get hydraulic fracking restrictions on their books.  Proposed legislation to regulate and tax fracking operations is currently pending in the Illinois General Assembly.  In particular, Senate bill SB3280, introduced earlier this year by state Sen. Michael Frerichs, was unanimously passed in the Senate on April 23, 2012 and is currently pending debate in the Illinois House of Representatives.  This bill would require companies to establish safeguards for storage and disposal of wastewater and test the integrity of the cement and steel well casings that are designed to protect groundwater during fracking operations.   The Senate bill also requires that companies disclose the chemical formula of the fracking fluid to the Illinois Department of Natural Resources and to the public.  A provision in the bill would provide limited protection to companies against the disclosure of certain information on the basis of trade secret.  However, landowners directly affected by hydraulic fracking and certain Illinois agencies would be permitted to challenge a company’s trade secret claim.

Illinois state Rep. Naomi Jakobsson is sponsoring a bill in the House of Representatives that is virtually identical to the Senate bill.  Illinois House Speaker Michael Madigan also recently introduced a separate House bill that would create additional regulations as well as impose a 12 percent tax on oil and gas revenues related to fracking operations.  Speaker Madigan’s bill has drawn criticism from industry groups who have argued that the 12 percent tax would be among the highest in the nation, second only to Alaska, and would discourage economic growth and development in Illinois.

While none of the proposed Senate or House bills have been signed into law, there appears to be strong support among Illinois lawmakers that the regulation of hydraulic fracking activity is needed.  However, the scope of those regulations, and whether Illinois will ultimately tax the fracking industry, is still subject to debate.  We will continue to monitor these issues and provide updates in future additions of this Digest as they develop.  

Published In: Administrative Agency Updates, Energy & Utilities Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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