Drilling Down: A Look at the State of Hydraulic Fracturing Regulation, Legislation and Litigation in 2013

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Hydraulic fracturing remained one of the most controversial environmental issues of 2013.  Hydraulic fracturing, also known as fracking, is the process of injecting water, chemicals and “proppants,” oftentimes sand, under high pressure several thousand feet below the surface to increase reservoir permeability and unlock otherwise uneconomic oil and gas reserves. Fracking remained a hot button issue in 2013.  Fracking has and will continue to draw the attention of Congress, state legislatures, regulatory agencies, environmental groups, municipalities, water agencies, oil and gas exploration companies, and the insurance markets.  The increased use of fracking, as a production tool, has dramatically increased the volume of recoverable oil and gas reserves in the United States, and allowed the country to take a major step forward in attaining the long-held goal of energy independence.

The legal, policy and economic issues associated with fracking both here and abroad are legion; we highlight some of the most significant ones in this issue of the Hydraulic Fracturing Digest.

Fracking Bans

Local bans on fracking started in upstate New York, where municipalities won significant victories in court against challenges to their home rule authorities.  The towns of Dryden and Middlefield each passed resolutions banning hydraulic fracturing within their borders, both of which were upheld by the courts.  Next door in Pennsylvania, things took a slightly different course.  In 2012, the Pennsylvania Legislature passed Act 13.  Among the Act’s provisions is one that specifically preempted local governments from banning oil and gas development.  See 58 Pa. CS. § 3304. There is a similar fight going on in New York state, as the state’s high court agreed in August 2013 to consider the issue after lower appellate courts upheld trial court decisions, which had held that state mining statutes did not preempt local laws blocking fracking.

In November 2013, voters in three Colorado communities (Boulder, Fort Collins and Broomfield) passed five-year moratoriums on hydraulic fracturing, and a fourth, Lafayette, voted to ban hydraulic fracturing within its borders. Despite strong opposition by the Colorado Oil & Gas Association, Boulder and Fort Collins passed five-year moratoriums on November 7, 2013, and voters in Lafayette strongly favored an outright ban.  All three communities lie near the Niobrara Shale oil field, where production has been on a steady increase.

The Illinois Legislature recently adopted statewide fracking regulations as a means of heading off local bans and moratoriums similar to those enacted in Colorado.

Deep in the heart of Texas, the city of Dallas delayed issuing necessary drilling permits after the citizens of Dallas voiced strong opposition to what would have been the first “frack job” within the city’s limits.  On August 28, 2013, the Dallas City Council rejected the company’s permit applications (the vote was 9-6 for approval, but required a supermajority of 12 to pass).  A legal challenge to the City Council’s rejection of the permit application, if filed, would be one to watch carefully, as it could raise not only municipal home rule issues similar to those in Colorado, Pennsylvania and New York, but also constitutional takings issues due to the prior leasing of the land for oil and gas development purposes.

On November 15, 2013, Mora County, N.M. was sued in U.S. District Court by the Independent Petroleum Producers of New Mexico, a trade group, the Mountain States Legal Foundation, landowner Mary L. Vermillion, the JAY Land Ltd. Co., and Yates Ranch Property. The lawsuit alleges the Mora County “community rights ordinance,” which bans oil and gas drilling within the county, violates their rights under the First, Fifth and 14th Amendments to the U.S. Constitution.

The preemption and takings issues associated with so-called “Home Rule” legislation will remain a hot button issue in 2014.  The creation of a patchwork of rules and regulations – think checker boards – will eventually need to be approved by the highest courts in each state.

Disclosure

The FracFocus Chemical Disclosure Registry, a joint effort by the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission, is an online registry for companies to disclose publicly the chemicals used in fracking fluids.  FracFocus has been formally adopted by some states as the legally mandated forum for fracking fluid disclosures, and rejected by others.  An April 2013 study released by Harvard University concluded that the FracFocus website has “serious flaws,” including a lack of oversight by governmental regulatory agencies and inconsistent application of trade secret claims.  The U.S. Department of the Interior also recently proposed regulations for fracking on federal lands that would similarly rely on the FracFocus website.  The Colorado Oil and Gas Conservation Commission has warned the industry that it will continue to step up enforcement efforts on hydraulic fracturing disclosure, and the state is currently pursuing cases against 11 companies for not filing FracFocus reports.

More than half of the states, 15 of 29 in which hydraulic fracturing activity is ongoing, have enacted laws requiring disclosure of information about the chemicals and additives in hydraulic fracturing fluid.  Legislation requiring disclosure is pending in at least an additional seven states.  Among these states, Alaska’s proposed regulations stand out because they provide no trade secret exemption.  If enacted as proposed, Alaska will require specific disclosure of the chemical compounds and additives in fracturing fluids, and would be the only state that would not provide any protection from public disclosure for confidential business information concerning fracking fluid contents.

Other states, such as Ohio, have taken the middle path in requiring companies to disclose the “maximum concentration” of additives, in addition to the Chemical Abstract Number.  Pennsylvania, on the other hand, has, through the enactment of Act 13, placed restrictions on doctors, granting them access to trade secret information to help treat patients who allege they became sick after exposure to fracking fluids.  Although doctors would be able to share that information with the patients and other treating physicians, they would have to sign confidentiality orders preventing them from releasing the data to a wider audience.  In what is thought to be the first of its kind, a Pennsylvania court threw out a doctor’s challenge to a gag order preventing the disclosure of chemicals used in hydraulic fracturing.  Nevertheless, the court did not eliminate the prospect of future lawsuits from physicians seeking to disclose industry trade secrets for medical reasons – that prospect remains high.

In California, SB 4 will require exploration and development companies to disclose the trade name and supplier, in addition to providing a descriptions of the additives used in the well-stimulation fluid, within 60 days after the reservoir enhancement process is concluded. California’s draft rules, issued on November 15, 2013, include plans to undertake a study on the overall environmental impacts of fracking within the state. The study’s potential effects on individual permits and mitigation requirements will set the stage for legal challenges between the oil and gas industry and environmental groups.  Many of these legal challenges likely will be driven by the California Environmental Quality Act.  The new rules are scheduled to take effect in January 2015; however, emergency regulations, covering the principal requirements of SB 4, will go into effect in January 2014.

The Michigan Department of Environmental Quality is developing new rules for hydraulic fracturing, which add protections for water resources and require additional chemical data submissions from drilling companies.  Under the proposal, operators will be required to reveal chemical additive data through the national FracFocus disclosure registry, including chemical composition and maximum concentration used during the fracking process.

On November 20, 2013, the Wyoming Supreme Court heard arguments over whether a trade secrets exemption in Wyoming’s public records law may be invoked to shield from disclosure many of the chemicals the petroleum industry uses in hydraulic fracturing.  The Powder River Basin Resource Council, a landowner group, and the Wyoming Outdoor Council argued that individual ingredients in the various chemical products used during hydraulic fracturing cannot be considered trade secrets, and all information filed with the state must be made available to the public upon request.

The Wyoming Oil and Gas Conservation Commission and the Halliburton Company argued that the disclosure of all of the individual chemicals in the product can be trade secrets because, when evaluated in toto, the list would provide sufficient information to reverse engineer the product and provide a competitive advantage to other companies.

The U.S. Environmental Protection Agency (EPA) is debating the scope of disclosure it will require. However, the EPA’s disclosure rules may be moot, from a practical standpoint, as the trend at the state level is to mandate disclosure, which in turn appears to be driving many oil and gas exploration companies to “self-disclosure” via FracFocus.

Litigation

Between 2009 and November 2013, more than 50 lawsuits alleging groundwater contamination were filed by landowners in Arkansas, Colorado, Louisiana, New York, Ohio, Pennsylvania, Texas and West Virginia against exploration companies. The majority of plaintiffs in these suits were landowners who had leased their oil and gas rights or landowners whose properties were adjacent to or near the hydraulic fracturing operations.  In October 2013, North Dakota landowners filed 10 class action suits against several oil companies seeking millions of dollars in allegedly lost royalties.  The complaints include causes of action for the conversion of gas flared without payment of royalties, and a common law “waste of gas” flared without payment of royalties.

On November 25, 2013, the Texas Supreme Court agreed to hear a trespassing case that will decide whether landowners can sue when wastewater from underground injection wells ends up on their property. The decision will have a significant effect on companies’ hydraulic fracturing operations, as fracking generates large volumes of water that eventually needs to be disposed of in the subsurface. The Texas Supreme Court’s prior decisions dealing with the right to bring trespass claims skirted this issue in FPL Farming Ltd  vs Environmental Processing Systems LC.   351 S.W.3d 306 (Tex. 2011)  (the first of two appeals of this case to the Texas Supreme Court; the second of which is scheduled to be heard on January 7, 2014)and Coastal Oil & Gas v. Garza,< 268 S.W.3d 1 (Tex. 2008) in which the Texas Supreme court found that the “rule of capture” prohibited the adjacent landowner’s recovery of the value of gas drained from his property as the result a trespass caused by a well that had been hydraulically fractured.

Other fracking related lawsuits allege that fracking: caused earthquakes; violated state and federal land use regulations; contributed to climate change; caused cancer and other illnesses; and violated lease agreements by plugging wells and failed to timely drill, thus allowing leases to lapse.  In addition, suits were filed by state and federal enforcement agencies for violating environmental regulations, municipal bans were enacted and challenged, and a spate of suits were brought over oil and gas lease disputes. A majority of the lawsuits have either been settled or are winding their way through state and federal courts.

International

Outside of the United States, several nations have taken steps to address fracking within their borders.  On October 9, 2013, the European Parliament narrowly voted in favor of an amendment to the European Union’s (EU) Environmental Impact Assessment Directive (EIA Directive), which would require environmental impact assessments (EIA) to be performed for hydraulic fracturing for coal bed methane, and in shale and formations with shale-like permeability and porosity.  If the amendment becomes law, the amended EIA Directive would require all private and public shale gas and many other unconventional exploration projects involving hydraulic fracturing in the EU to undertake an EIA.

On the flip side, Chevron signed a 50-year agreement with the Ukrainian government in 2013 to develop oil and gas in western Ukraine.  The government said that Chevron would spend $350 million on the exploratory phase of the project, and the total investment could reach $10 billion.  Western oil companies trying to find shale gas in Europe are discovering that Ukraine, eager to reduce its dependence on Russian energy imports, is unlike several other European countries, a willing partner.

Environmentalists in the United Kingdom (U.K.) have been willing to put their bodies on the line to prevent fracking from occurring or expanding within the U.K.  In one instance, activists glued themselves to walls, in other cases they have taken to barricading public roadways and scaling drill rigs to protest fracking.  Greenpeace has begun a campaign that encourages U.K. landowners to use trespass laws to block exploration.  The group proposes that drilling horizontally under land, other than the land leased by the exploration ventures – a technique commonly used in shale gas production – is illegal unless the property owner gives her or his permission.

The U.K. isn’t the only nation where environmental groups have galvanized to halt or at least slow down the pace of exploration in their attempt to prevent the potential that the success of the fracking industry in the United States’ shale fields will be repeated in Europe.  France’s highest court recently upheld a ban on fracking, while companies looking to develop oil and gas fields in South Africa face ongoing legal battles over the use of fracking techniques.

Insurance

The insurance industry is just beginning to address the myriad of coverage issues, which have and will continue to arise out of the alleged losses due to fracking activities.  Under a typical insuring provision, property coverage is dependent upon the existence of direct physical loss or damage to covered property at the premises described in the policy, as opposed to an unidentified off-site location not identified in the policy.  Thus, first-party insurance coverage may be unavailable to the extent that the only known direct physical loss or damage of a particular fracking claim occurred at an off-site location not otherwise insured under the policy under which the claim was made.

Liability insurance often contains exclusions precluding coverage for bodily injury or property damage “expected or intended.”  Often, those policies do not specifically define the words “expected” or “intended,” which is left for the courts to interpret.  As a result, relying on this exclusion can lead to uncertainty and expensive litigation.  Whether coverage exists under a particular policy likely will turn on whether the insured “expected or intended” the resultant injury or damage, which is determined under a legal rule that views the insured’s acts to be judged against an objective standard.  The objective standard’s focus is on whether a “reasonable person” should have known that the injury or damage at issue would have resulted from his or her conduct.  In contrast, a subjective standard requires evidence that the insured actually expected or intended the consequent injury or damage.  After all, in fracking, the insured “intentionally” injects the chemicals and water under high pressure with the expectation of causing massive fractures in the subsurface.

State Regulations

In September 2013, California’s governor signed Senate Bill 4 (SB4) into law.  SB4 established California’s first comprehensive legislation focused entirely on hydraulic fracturing and other well stimulation operations.  California’s new law requires operators to notify anyone residing within 1,500 feet of a wellhead at least 30 days before commencing operations.  The law also established criteria for groundwater monitoring, and requires operators to undertake pre-fracking baseline investigations and post-fracking groundwater testing upon request by residents within the area of influence.  In addition, SB4 requires operators performing hydraulic fracturing and well stimulation to comply with state rules as well as applicable federal regulations.  Violators are subject to civil penalties, ranging from $10,000 and $25,000 per day per violation.

On November 14, 2013, California released newly proposed fracking regulations intended to implement SB4.  The regulations are thought to be the most stringent in the United States, and will require exploration and production companies to notify the public before they start hydraulic fracturing operations, and disclose chemicals used in the undertakings.  In addition, the new regulations create a new permitting regime for fracking and other well stimulation techniques, and require groundwater monitoring, public notification and the disclosure of chemicals used in the fracking process.  Public comments will be taken at hearings to be scheduled in five California cities in the first half of January 2014.  The proposed regulations are scheduled to take effect in January 2015.

On November 12, 2013, the Wyoming Oil and Gas Conservation Commission voted to adopt regulations requiring oil and gas exploration companies to test permitted and adjudicated water sources.  The companies must receive written consent from the property owners to conduct the testing.  Under the regulations, however, any hydrocarbons discovered during testing cannot be used to create a presumption of liability or causation on the part of the companies.  Determination of admissibility of oil test results and causation will be left to the courts to decide. These regulations will become effective March 14, 2014.

Federal Regulations

An estimated 500 million cubic feet of gas are trapped in the Marcellus Shale Formation, which covers 95,000 square miles stretching between Virginia and Ohio.  The Bureau of Land Management (BLM) has introduced new regulations regarding hydraulic fracturing on federal lands, and the U.S. Environmental Protection Agency is conducting a study on the controversial extraction method’s potential impacts.  Additionally, recent lawsuits against BLM and others are affecting the National Environmental Policy Act and the Endangered Species Act review, and have resulted in the suspension of leasing activities on BLM lands.

The federal government has allowed oil and gas drilling on other public lands, mostly in the West, where it owns large tracts of wilderness.  Production from about 92,000 oil and gas wells on public lands makes up about 13 percent of the nation’s natural gas production and 5 percent of its oil production, according to the Interior Department.  The BLM administers about 700 million acres of land holding mineral resources, and Chesapeake Energy and other natural gas explorers are pressing officials for wider access to them.

On November 19, 2013, President Obama pledged to veto the Federal Lands Jobs and Energy Security Act, H.R. 1965, and the Protecting States’ Rights to Promote American Energy Security Act, H.R. 2728, if the bills make it to his desk, saying the bills would sabotage environmental protection efforts.  H.R. 2728 is drafted such that it would restrict the U.S. Department of Interior’s ability to place nationwide regulations on drilling companies. The White House stated that “H.R. 1965 runs contrary to the administration’s commitment to promoting safe and responsible domestic oil and gas development as part of an energy strategy that reduces the nation’s dependence on foreign oil by increasing domestic production and increasing the fuel economy of the country’s cars and trucks.”   On November 20, 2013, the House voted 228 to 192 to approve the Federal Jobs and Energy Security Act, H.R. 1965, and passed the Protecting States’ Rights to Promote American Energy Security Act, H.R. 2728, by a vote of 235 to 187.

Competition for Resources

The competition between agriculture, energy, domestic and environmental interests for water in California and elsewhere is fierce and is becoming more contentious.  In a “wet year,” the demand for water from these interests may exceed the ability to deliver sufficient supply of water to the end user.  In a drought period, the demand for water most likely will exceed the available supply.  When demand exceeds supply, the issue of what constitutes a beneficial use and which beneficial use best serves the people of a particular state will need to be decided.  In California and elsewhere, existing law and policy empower local and regional authorities with the authority to determine which use is “most beneficial.”  In the end, the final arbiter of this issue likely will be the courts.  In California, as in other states and jurisdictions, the state owns the water, and all others have an usufructuary interest, which “confer[s] the legal right to use the water that is superior to all other users, [but] confer[s] no right of private ownership” in the water itself.

One example of what can happen if a reasonable balance is not achieved was foreshadowed in a recent report from the Texas Commission on Environmental Quality, which estimated that, given ongoing drought conditions and a large increase in groundwater withdrawals for oil and gas development, numerous Texas communities face the unprecedented risk of running out of water entirely.

Wisconsin, home to one of the nation’s largest easily mined reserves of high-quality frack sand, must decide whether to encourage or limit the mining of this essential component of the fracking process.  More than 100 frack sand mining operations have started business in the last several years, mostly in previously undeveloped wilderness areas.  It takes approximately 2,000 tons of sand to frack a well.  Not surprisingly, industry and environmentalists have opposing views on the benefits of maximizing the use of this resource in previously undeveloped areas.  In light of the increasing use of fracking to unlock previously uneconomic oil and gas resources throughout the United States, the stakes are high.

Topics:  Energy, Fracking, Fracking Bans, Natural Gas, Oil & Gas, Shale Gas

Published In: Constitutional Law Updates, Energy & Utilities Updates, Environmental Updates, Zoning, Planning & Land Use 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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