Fracking Insider - Key Insights Into Federal Policy and Regulatory Developments

The House Appropriations Committee’s Subcommittee on Interior, Environment, and Related Agencies held a hearing on Tuesday to discuss the FY2014 budget for the Bureau of Land Management (BLM).  BLM manages over 700 million acres of federal lands and  is promulgating regulations for hydraulic fracturing on such lands. Neil Kornze, the Principal Deputy Director of the agency, was the only witness at the hearing. There was significant discussion at the hearing of the economic benefits of hydraulic fracturing, the prospect of new regulations on the practice, and the effects of sequestration on the agency and its ability to efficiently process permit applications.

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Three pieces of legislation recently introduced by Rep. Markey (D-MA) and Rep. Holt (D-NJ) would have major impacts on the oil and natural gas markets in the U.S.:

H.R. 1189, the American Natural Gas Security and Consumer Protection Act, would prohibit the exportation of natural gas without authorization from the Secretary of Energy. To grant authorization, the Secretary must determine whether the proposed exportation will be consistent with the public interest, and must specifically consider the effects of the proposed exportation on domestic energy expenditures, the economy, energy security, greenhouse gas emissions, and other factors.  Currently, DOE authorization is only required for exports to countries with which the U.S. does not have a free trade agreement.

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A bipartisan group of Senators has proposed legislation to expedite approval of LNG exports to NATO members, Japan, and to any other country to which the Secretaries of State and Defense determine export would promote U.S. national security interests. Currently, Section 3(c) of the Natural Gas Act requires expedited approval for export requests to countries with which the U.S. has a free trade agreement. There are 18 countries that meet this standard for expedited approval, while requests to other countries have been held up in a lengthy review processes with significant doubts over whether approval will ever be granted. The Senate bill, called the Expedited LNG for American Allies Act of 2013 (S. 192), would broaden the scope of countries that will receive expedited treatment in the DOE review process.

Supporters of the bill have emphasized both the economic and national security benefits of the bill. The shale gas revolution in the U.S. has generated an oversupply of domestic natural gas, which has reduced the price precipitously. Without adequate market demand for these supplies, incentives for further production will erode, and the potential environmental and economic benefits of increased natural gas usage will go unrealized. Additionally, allowing export of natural gas will reduce the political leverage that Russia is able to exert on NATO allies in Europe because of those countries’ current dependence on Russian natural gas supplies.

The bill was introduced by Senators Barrasso (R-WY), Inhofe (R-OK), and Cornyn (R-TX), and is cosponsored by Senators Begich (D-AK), Coburn (R-OK), Enzi (R-WY), Heitkamp (D-ND), Hoeven (R-ND), Johnson (R-WI), Lee (R-UT), Vitter (R-LA), Boozman (R-AR), and Blunt (R-MO).

On February 12^th, the Senate’s Committee on Energy & Natural Resources held a hearing entitled “Opportunities and Challenges for Natural Gas.” The major themes of the hearing were that natural gas production techniques have led to an abundance in domestic natural gas supplies, that this abundance provides significant benefits to the U.S. economy, environment and national security, and that policies need to be crafted to preserve these benefits while addressing the challenges simultaneously presented by the abundance of natural gas. Here’s a review:

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On October 23, 2012, Kelley Drye & Warren, LLP convened a conference of key members of the oil and gas industry and energy-intensive manufacturing industries.   The seminar, entitled Hydraulic Fracturing, Natural Gas and the U.S. Manufacturing Renaissance, took place at the Ronald Reagan Building and drew over 60 companies and trade associations involved in the oil and gas industry or in industries benefitting from a thriving domestic natural gas market. 

Participants included energy-intensive industries, manufacturers that use natural gas as a feedstock, and companies that sell products and materials into the natural gas market.   They were joined by representatives from federal, state, and local government, labor representatives, and numerous members of the oil and gas industry.

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On Monday, July 11, Governor John Kasich signed Senate Bill 315, which ushered in broad new requirements governing hydraulic fracturing and unconventional drilling operations in Ohio, which is home to portions of the Marcellus and Utica Shale formations.   The broad rules amend Ohio Revised Code Chapter 1509 to specifically define “horizontal drilling” and to cover a broad spectrum of issues, including chemical disclosure, water use/origin disclosure, and well construction requirements.  Perhaps most significantly, however, is what was not covered by the rules: Governor Kasich has been loudly advocating for a severance tax on high-producing fracked wells to fund his income tax relief efforts.   Lawmakers opted to leave out the severance taxes due to concerns about the impact of such taxes on O&G investment in the state and because the concept of targeting the tax burden to certain operators based on output and formation faced legal headwinds and, in practice, could create delineation problems.  Nonetheless, while the Governor’s severance tax program failed to make the cut, he still was able to sign a bill that made some meaningful changes to Ohio’s O&G rules.  Here are some highlights:

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The controversy over hydraulic fracturing has ushered in an unprecedented wave of scrutiny over the oil and gas industry from nearly every angle—new lawsuits, more state regulations, constant press (often misleading as captured well in this recent Forbes article), local protests, and city council moratoriums. At the same time the President has reeled off a series of positive statements about the future of natural gas (the most recent being his support for tax credits and other incentives to spur natural gas truck fleets), other factions in the administration are undermining the message. Companies trying to make intelligent business decisions and major capital investments—in addition to trying to gauge the whims of the market and project future demand—are being forced to navigate what is quickly becoming an increasingly uncertain and unclear regulatory environment. To try and make sense of what’s going on in Washington D.C., here are four key federal initiatives every company should be watching.

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As the pace of natural gas and oil drilling in unconventional plays increases, the industry continues to be faced with a broad suite of environmentally-related legal concerns. These include multiple regulatory initiatives both at the Federal and State levels (including EPA’s and DOE’s ongoing studies) and federal legislation (including the Breathe and Frac Acts). As companies plan future strategies in this complex, dynamic legal environment, there are several key trends emerging that are likely to influence where and how companies operate. Understanding these trends can help companies optimize resource allocation and potentially gain crucial competitive advantages.

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Democratic Members of the House Energy and Commerce Committee appealed to the Committee's chairman and the chairman of its Subcommittee on Oversight and Investigations to hold a hearing on the subject of hydraulic fracturing in natural gas production. Citing "new information" on fracking and pointing to other Congressional committees' hearings on the topic, the Committee's former Chairman and current Ranking Member Henry Waxman (D-CA), and the ranking members of two of its subcommittees, Ed Markey (D-MA) and Diana DeGette (D-CO), charged that Chairman Fred Upton (R-MI) and Subcommittee Chairman Cliff Stearns (R-FL) are making a mistake in not holding a hearing given the Committee's broad jurisdiction over the nation's energy policy.

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Eric Waeckerlin contributed to this post.

EPA’s Administrator, Lisa Jackson, said yesterday EPA will issue guidance soon on the use of diesel fuel as a chemical additive in hydraulic fracturing fluids for oil and natural gas production. The forthcoming guidance comes in the wake of much industry uncertainty caused by the EPA’s website posting in August of 2010 stating that “[a]ny service company that performs hydraulic fracturing” using diesel fuel in the fracking fluid must obtain Underground Injection Control (UIC) program permits as Class II wells. Currently EPA has not required such a federal permit, and the forthcoming guidance marks the first time EPA has meaningfully weighed in on this issue.

Indeed, EPA’s website pronouncement is the subject on ongoing litigation in the United States Court of Appeals for the District of Columbia in a challenge brought by IPAA—a national trade association comprised of independent oil and gas producers and field service providers. While IPAA does not dispute the EPA’s authority under the Safe Drinking Water Act (SDWA) to regulate fracking operations that use diesel fuel, it asserts that EPA circumvented federal administrative law in an attempt to regulate hydraulic fracturing outside of comment-and-notice rulemaking. Without a clear federal mandate to obtain a federal permit and no practical means of doing so (at least currently), significant uncertainty remains for operators who have used or are using diesel without being expressly permitted.

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Andrew Revkin, of the New York Times, has written a short, but very reasonable and worthwhile piece on the ongoing public debate/controversy/vitriol/rhetoric surrounding the shale-gas boom, and the use of hydraulic fracturing (fracking) (which as many do, and should, point out, is a process used to drill for natural gas and oil in certain geologic formations, is not new, and does not, without more [e.g., a spill, broken well casing etc.], cause environmental or public health harms). Revkin argues that inherent human predispositions toward certain outcomes make objective and calm scientific debate difficult, citing global warming as exhibit A. His thesis and plea for reason should be welcomed in the ongoing and nascent fracking debate—which has already seen its share of outlandish claims from all sides. Perhaps Revkin sums up best how to achieve a rational debate in the following statement -

In the absence of data comes spin and overstatement - and a reliance on advocates of one stripe or another, including scientists staking advocacy positions. None of this is a good thing.

The ball is in the industry’s court to acknowledge that there are bad actors and to move toward far deeper transparency and accountability on methods, or it will justifiably lose public faith and the prospect of stronger regulation. The shale gas rush (and a similar oil rush under way in other regions) is clearly in it[s] frontier days.

Eric Waeckerlin contributed to this post.

As a result of a revised briefing schedule, the Independent Petroleum Association of America (IPAA) is poised to file its brief challenging the Environmental Protection Agency’s (EPA) website notice of federal permitting requirements for hydraulic fracturing (fracking) operations that use diesel fuel. Under the revised briefing schedule, the IPAA brief is due today. The EPA’s response brief is due June 1, 2011.

As background, on August 21 2010, the IPAA—a national trade association comprised of independent oil and gas producers and field service providers—filed a petition in the United States Court of Appeals for the District of Columbia (D.C. Circuit) alleging that the EPA surreptitiously created new federal regulatory requirements related to fracking in contravention of federal administrative law. The IPAA asserts that the EPA’s actions “have serious and economic consequences and constitute reviewable final agency action.”  The EPA, the IPAA asserts, should have adhered to the Administrative Procedure Act (APA) notice and comment rulemaking requirements when issuing its fracking permitting notice.

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Yesterday, the Fracturing Responsibility and Awareness of Chemicals (FRAC) Act was re-introduced in both the House and Senate.  The House bill (H.R. 1084) was introduced by Representatives Diana DeGette (D-CO), Maurice Hinchey (D-NY), and Jared Polis (D-CO) and has 31 co-sponsors to date.  Senator Robert Casey (D-PA) introduced the companion Senate bill (S. 587), with Senators Chuck Schumer (D-NY), Dianne Feinstein (D-CA), Kirsten Gillibrand (D-NY), Frank Lautenberg (D-NJ), Sheldon Whitehouse (D-RI), Bernie Sanders (I-VT), and Ben Cardin (D-MD) as original co-sponsors.  Congresswoman DeGette and Senator Casey were the lead sponsors of the FRAC Act in the previous Congress.

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Ian Urbina’s polemical three part series on fracking, which ran in the New York Times last week, has caused a mighty uproar from environmentalists to industry and everyone in between.  In Pennsylvania, the epicenter of Urbina’s allegations that natural gas companies and water authorities have been dumping untreated, radioactive-laden wastewater into public waterways, two water providers committed last Thursday to begin testing for radioactive contamination in drilling water.  Today, the Environmental Protection Agency (EPA) notified the state it is required to test for radioactivity at drinking water intake plants within 30 days.  Meanwhile, in response to the series’ reporting on ozone levels in Wyoming, the Wyoming Department of Environmental Quality announced plans late last week to increase inspections and monitoring related to ozone non-compliant counties.  And in the wake of recent unexplained earthquakes in Arkansas in the vicinity of natural gas drilling operations, two companies with drilling operations in Arkansas announced they would no longer inject used natural-gas drilling fluid in two nearby wells.

The New York Times's series and the reactions out of those three states demonstrates that environmentalists are “on message” and industry’s response has largely been reactionary.  That is not to say industry does not have a persuasive counter-position.  Lost in the disturbing images of tap water on fire and radioactive contaminated drinking water, are often the facts about fracking (for example see Energy In Depth's factual rebuttal to the Oscar-nominated film "Gasland"), the actual risks of environmental harm from drilling operations, and the scope of existing regulatory oversight.  Regarding the latter, former Pennsylvania Governor Ed Rendell authored a short but poignant op-ed in this weekend’s New York Times on Pennsylvania’s ongoing efforts to ensure safe drilling operations.  In many respects from the increased use of closed-loop water recycling, to better well-design procedures, to the reality that the fracking zone is often separated from drinking water by thousands of feet of impermeable rock, industry has a positive story to tell.  At a minimum, industry should look to create an honest dialogue based on facts and sound science.  As EPA’s fracking report moves forward and pressure for Congressional oversight continues, it will be critical for industry to find its voice; separating and addressing legitimate concerns from unsubstantiated rhetoric.  And perhaps most importantly, calming the overheated public conversation.    

If there were any questions about the national importance of the Range case, which this blog has covered since December 2010, the questions have been answered. On February 14, 2011, Senator Inhofe, Ranking Member of the Senate Committee on Environment and Public Works (EPW) sent a letter to EPA’s Inspector General, requesting that he “obtain and secure, as soon as possible, all documents and records throughout the Agency related to the communications between EPA Region 6 and US EPA headquarters, both intra-Agency and with outside entities, in connection with activities” relating to the December 7 Emergency Order against Range. Senator Inhofe’s request comes in the middle of a heated fight between Range and EPA over both the basis for EPA’s decision to issue the Order and Range’s requests to depose certain EPA employees and obtain certain documents.

Senator Inhofe has been a vocal proponent of the oil and natural gas industry, telling Administrator Jackson earlier this year during EPW’s first committee hearing that he expects to be intimately involved in EPA’s ongoing fracking study and future Agency actions. It looks like the Senator is getting involved much sooner then he had anticipated. Expect similar Congressional pressure to continue as EPA grapples with this controversial issue.