Ohio Governor Signs Legislation to Address Horizontal Drilling Issues

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[author: Mary Ann Poirier]

On June 11, 2012, Ohio Governor John Kasich signed into law Senate Bill 315, ushering in several changes to Ohio’s existing oil and gas laws. The law, pushed by the Kasich Administration, addresses what had been perceived as deficiencies in the statutes on the books in dealing with the issues unique to horizontal drilling and hydraulic fracturing.

Significant Changes

Key provisions in S.B. 315 include a requirement that permit applicants identify the source of water used to fracture their wells, whether it be ground or surface water, or even recycled water. (This is no small amount of water usage, considering that a single horizontal well can use upwards of 5,000,000 gallons of water in the fracking process.) Water sampling of nearby wells is now a statutory requirement; in urban areas, an operator must conduct well-sampling for wells within 300 feet of a proposed well, whereas in non-urban areas, the radius is 1500 feet.

Permit applicants now are to include in their applications a copy of agreements with local government officials regarding the maintenance and safe use of roads. Those familiar with the increased road traffic attributable to development of the Marcellus Shale in Pennsylvania and West Virginia no doubt can appreciate the wisdom behind this new requirement. And the Ohio counties most affected by the Utica/Point Pleasant activity are not inexperienced with this issue, as many have passed ordinances to put in place a standard “Road Use and Maintenance Agreement” for the very purpose of managing the impact to their roads.

Senate Bill 315 allows the Ohio Department of Natural Resources to enter into cooperative agreements with other state agencies, to make use of those agencies’ expertise. The reasoning behind this provision is tied to ODNR’s expansive and nearly-exclusive jurisdiction of all things oil and gas. For example, if a multi-well well pad is large enough to house a trailer for the workers, the ODNR has jurisdiction not only over the wells but also the conditions of that trailer – yet living-condition matters are not the typical province of ODNR. The new law allows ODNR to make use of the Ohio Department of Health’s expertise in such matters, even allowing ODH to make site visits. But at the same time, the law is clear that the ultimate authority still rests with ODNR.

Perhaps one of the more extensive new requirements pertains to chemical disclosures and, in particular, the chemical additives used to stimulate the well (anywhere between 0.5% and 2% of the injected fluids). The new Ohio provisions require disclosure of all chemicals used in drilling any portion of the well; Ohio regulators call this a “cradle to grave” requirement and tout it as one of the most expansive sets of disclosure obligations in the country. These chemical disclosures will be available through the fracfocus.org website (the chemical disclosure registry established by the Groundwater Protection Council). Of note, however, operators may – in lieu of disclosing their chemicals – claim trade secret protection for products, fluids or substances that are entitled to such protection. As might be expected, that the legislature included this trade-secret protection has met harsh criticism; critics argue that it grants too much secrecy to the oil and gas industry, and puts persons who might be harmed by the “secret” chemicals in the position of not having enough information to launch a successive attack against the chemical use.

Unitization applications under ORC 1509.28 – to form a drilling unit where 65% of the land has already been secured by lease – now must be accompanied by a non-refundable $10,000 fee. (Industry watchers will recall that Chesapeake Energy led the charge in filing the first-ever unitization application in Ohio for a horizontal well drilling unit in November 2011; but when Chesapeake filed, there was no such fee.) Another change is that a horizontal well operator must carry $5 million in liability insurance (as compared to the $1 million policies required by non-horizontal well operators). A provision added late in the bill’s process is a notice requirement obligating ODNR, within two days of issuing a permit, to post notice of the permit on its website. Also of note, and with an eye toward the midstream operations that are becoming more of a reality in the state, S.B. 315 clarifies and extends the types of midstream facilities (e.g., gathering lines) required to meet federal safety standards. And on the enforcement front, a failure to file required reports now is considered a “material and substantial violation”, and each day of a violation of an oil and gas statutory requirement is now considered a separate violation.

What Did Not Happen . . . and What’s Next

Perhaps just as significant as what the new law does is what it does not do. An early version of the bill would have granted jurisdiction over Clean Water Act 404 permits (for dredge and fill activities) to the Ohio EPA rather than the U.S. Army Corps of Engineers. Another provision that was cut would have imposed significant fees on out-of-state operators that dispose of their wastewater in Ohio injection wells.

And don’t forget that Governor Kasich has been a proponent of increasing the taxes paid by the oil and gas operators in the state. Though such a measure was deleted from a recent mid-term finance package, expect this proposal to resurface in future legislative sessions.

Finally, expect ODNR to issue rules to flesh out the details of the new requirements. These rules would be in addition to those already expected in the near-term from ODNR (rules to address centralized impoundments, pipeline and spill prevention, just to name a few), as well as ODNR’s recent well construction rules. Also expect that as operators progress in their drilling and production activities, just how existing laws and regulations will be applied will continue to take shape.

An Opportune Time to Influence the Process

Those who watch Ohio legislative activity recognize this latest legislative effort as the third effort (in just two years) designed to address horizontal drilling operations. (S.B. 165 became effective in June 2010, and H.B. 153 – a budget bill that became effective in September 2011 – added an additional round of clarifications and also established the Division of Oil and Gas Resources Management.) That yet such another oil-and-gas law was enacted within such a short time-frame speaks volumes about just how much the oil and gas industry in Ohio has taken off in the past couple of years.

Stay tuned as the industry continues to develop, and the legislators and regulators continue to take steps to address the issues unique to this industry. Better yet, don’t just be a bystander. Instead, actively engage with your legislators and regulators to insure that any new laws and rules sensibly address the industry’s needs, buttress the economy and afford protections where protections are needed.