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Current Developments Affecting Hydraulic Fracturing Operations (September 2014)

September 2, 2014 | Energy, Natural Resources & Utilities

 

This is a further update to our coverage on law, regulation, and policy affecting hydraulic fracturing (“fracking”) operations. Our last installment was issued April 1, 2014 and may be found here. This update details changes in state and local bans and restrictions (these continue to proliferate in the absence of a federal scheme), regulatory developments at the state and federal level, emerging regulation of methane emissions, new requirements for oil transport by rail, state efforts to evaluate and regulate seismic risk and water use, international developments, and recent cases impacting the industry. In many instances, information provided in our previous update has been referenced below in order to provide context, although we encourage readers to refer to previous installments for a more in-depth analysis.

BANS ON FRACKING OPERATIONS

As state and local authorities continue to implement complete or partial bans or moratoria, several actions have been brought in state courts to challenge such restrictions. These actions are generally grounded in claims of preemption (based on state-wide regulatory schemes) or constitutional insufficiency (based on either infringement of contract understandings or takings without due process). Several of these cases have reached state high courts, with opinions from New York’s and Colorado’s highest courts being issued in July 2014.

A. New York

On June 30, 2014, in a 5-2 decision, the New York Court of Appeals (New York’s highest court) upheld Dryden and Middlefield bans under home-rule doctrine, finding that the New York Oil, Gas, and Solution Mining Law (“OGLE”)[1] does not preempt such home-rule authority. The high court applied a three-factor test in making its determination, finding that (1) the plain language of the OGLE provides for preemption only of local laws that regulate actual oil and gas operations as distinct from zoning ordinances that restrict or prohibit certain land uses within town boundaries; (2) the statutory scheme of the OGLE likewise justifies invalidating local laws that would intrude on the Department of Environmental Conservation’s oversight authority; and (3) legislative history supports the contention that local zoning laws that prohibit certain uses of municipal land are superseded by the OGLE. On August 6, 2014, the plaintiffs filed a motion for reconsideration, asking that the Court consider the recent decision by a Colorado court striking down a fracking ban in Longmont, Colorado (see discussion below) on similar facts. Commentators note that the motion is unlikely to succeed. The high court decision will significantly impede fracking operations in New York. At the local level, more than 20 New York municipalities, including Buffalo and Ithaca, have enacted outright bans on hydraulic fracturing, while many more have enacted temporary moratoriums.

On July 11, 2014, a New York trial court dismissed two complaints filed by plaintiffs in separate cases, both of which sought to compel the New York Department of Environmental Conservation to issue a final Supplemental Generic Environmental Impact Statement in connection with fracking operations. In two separate decisions, the trial court ruled that the parties lacked standing because they failed to demonstrate that they would suffer environmental harm absent issuance of the Statement (allegations were limited to claimed “economic” injury).[2] Plaintiffs Joint Landowners Coalition of New York, who represent New York property owners in favor of fracking, filed the complaint to compel Agency action that would end the five-year fracking moratorium. The February 14, 2014 complaint claimed that the delay created a negative business reputation for New York State, caused a substantial economic harm to landowners, and is contrary to the public policy of the state to maximize the economic benefits of its deposits of oil and natural gas. The other complaint was filed on December 17, 2013 by the bankruptcy trustee of an energy company that claimed it sustained substantial losses while awaiting termination of the New York moratorium. The trial court’s decisions have resulted in continued uncertainty for fracking operations in New York; recent indications suggest that action on the current moratorium will likely not occur until after the November 2014 gubernatorial election.

On July 31, 2014, the U.S. Court of Appeals for the Second Circuit certified two questions to the New York Court of Appeals (“NY Court”) in connection with New York’s fracking moratorium. The Second Circuit asked the NY Court to determine whether the moratorium constitutes a force majeure event for purposes of vitiating obligations under oil and gas leases.[3] More specifically, the Second Circuit asked the NY Court to consider “…whether the [m]oratorium was a force majeure event under the [l]eases require[ing] examination of whether regulatory actions baring ‘commercially viable’ drilling - but not all drilling -can constitute such an event.” If the NY Court determines that such a force majeure occurred, the Second Circuit is also asking the NY Court to determine whether such force majeure modifies the primary term of the lease, thereby extending the lease for the amount of time the moratorium is in place. It is unclear whether the NY Court will accept certification.

B. Colorado

On July 24, 2014, a District Court issued a decision striking down a 2012 City of Longmont fracking ban, finding that the state’s Oil and Gas Conservation Act (“Colorado ORCA”)[4] preempts the local law. The Court noted that its ruling will not become effective until after resolution of any appeal taken by the City of Longmont. On August 7, 2014, a different District Court issued a decision striking down the five-year fracking moratorium implemented by the town of Fort Collins, Colorado, also finding that the restriction is preempted by the Colorado ORCA. On August 27, 2014 the same court that overturned the Longmont fracking ban, also issued a decision striking down a ban implemented by the town of Lafayette, which in 2013, voted to permanently ban all new fracking operations inside its city limits. Lafayette residents have filed a separate class action lawsuit against the State of Colorado, Governor Hickenlooper, and Colorado Oil and Gas Association (“COGA”), claiming that enforcement of the Colorado ORCA violates the rights of the people of Lafayette, both under the U.S. and Colorado constitutions, depriving residents of their “individual and collective right to local, community self-government.”[5]

In 2013, both the cities of Boulder and Broomfield voted to enact or extend temporary moratoriums.[6] The five-year ban approved by Broomfield was upheld by a Colorado District Court Judge on February 27, 2014, finding that the results should not be set aside, despite the narrow margin of the ballot count, because Bloomfield complied with the applicable election laws. No appeal was filed within the 20-day window for such an appeal. See Cave v. Broomfield, No. 2013-cv-30313 (Colo. Dist. Ct. Feb. 27, 2014). No legal challenges were filed in relation to the Boulder restriction, as there are currently no active wells within the city’s limits. On June 24, 2014, voters in Loveland narrowly rejected a measure to implement a two-year moratorium on fracking within the city limits. Several measures regarding fracking that were anticipated to be on the November 2014 state-wide ballot were withdrawn in early August due to a compromise reached by various groups, including COGA, state legislators, Governor Hickenlooper, and Coloradans for Safe and Clean Energy. Under the compromise, a task force was created that will make recommendations to legislators on addressing land-use issues in connection with fracking, and will be comprised of environmental groups, local governments, and members of the oil and gas industry.

C. Pennsylvania

In response to growing local efforts to ban fracking, the state passed Act 13 in February 2012, which prohibited “any local regulation of oil and gas operations, including via environmental legislation,” while at the same time requiring “statewide uniformity among local zoning ordinances with respect to the development of oil and gas resources.”[7] On December 19, 2013, the Pennsylvania Supreme Court struck down provisions of the Act as unconstitutional.[8] The majority held that provisions of Act 13 unconstitutionally restricted the power of municipalities to govern oil and gas operations in their jurisdictions in violation of Section 27 of the Declaration of Rights in the Pennsylvania Constitution.

On July 17, 2014, the Pennsylvania Common Court issued a decision finding that a provision in Act 13 providing for review of contested zoning ordinances to the Public Utility Commission (“PUC”) and Commonwealth Court was inseparable from an Act 13 provision the Pennsylvania Supreme Court (“Court”) struck down as unconstitutional in its December 19, 2013 ruling. See Robinson Twp. v. Commonwealth of Pennsylvania, 83 A. 3d 901 (Pa. 2013). The Common Court’s ruling validates local fracking restrictions and requires challenges to such restrictions to be appealed before local zoning authorities, with appeals to the Courts of Common Pleas (not to the PUC). In August 2014, the PUC appealed the decision to the Pennsylvania Supreme Court.

On July 21, 2014, the Pennsylvania Auditor General released a report stating that the Department of Environmental Protection (“PaDEP”) was unprepared to effectively implement laws and regulations in relation to the expansion of the shale gas industry in a fashion that would adequately protect drinking water or respond to complaints by citizens. One such complaint was brought in July by the Pennsylvania Environmental Defense Foundation, seeking to enjoin the PaDEP to permit fracking on State lands. The Complaint was settled based on an agreement to reserve the Foundation’s claims that such State-land fracking leases are unconstitutional. On August 28, 2014, the PaDEP released data indicating that 243 cases were reported between 2007 and 2014 where a private water supply was impacted by oil and gas drilling activities, including wastewater spills and methane gas contamination.

D. Ohio

A case pending before Ohio’s Supreme Court (see case docket here) will test the primacy of State law over local fracking restrictions. As background, the City of Munroe Falls initially sought injunctive relief against Beck Energy Company for failing to comply with certain general, as well as oil-and-gas-specific, zoning restrictions while conducting oil and gas operations. Beck Energy argued that its state-issued drilling permit preempted the city’s zoning requirements. The trial court entered an injunction requiring compliance with the zoning restrictions. Beck Energy appealed, and the appellate court reversed, finding that Ohio’s Revised Code § 1509.02 gave the Department of Natural Resources “sole and exclusive authority to regulate the permitting, location, and spacing of oil and gas wells and production operations within the State of Ohio,” thereby preempting local ordinances to the extent that they sought to regulate drilling activities. The City of Munroe Falls appealed.

On appeal, the City argues that its “home-rule” authority granted under Ohio’s Constitution cannot be eclipsed by the Revised Code. Instead, the City has concurrent jurisdiction with the state’s natural resource division when regulating oil and gas development: the City determines which lands can be developed and for what purposes (the “where” question), and the division addresses the technical drilling requirements (the “how” questions). Many Ohio cities and health professionals filed amicus briefs in support of the City. APIA and other energy-producing companies operating in Ohio filed amicus briefs in support of the appellate court’s decision. Oral argument was heard on February 26, 2014, and a decision is expected before the end of 2014.

If the Ohio Supreme Court reverses the appellate decision and agrees with the City of Munroe Falls that the Revised Code does not preempt zoning ordinances, Ohio cities may be able to enact zoning ordinances that act as de facto bans on the practice. This may invite regulatory-takings litigation similar to what was seen in response to the City of Dallas’ restrictive zoning ordinance.

Eastern Ohio sits atop the Utica Shale and portions of the Marcellus Shale basins. On November 4, 2013, the town of Oberlin passed a “community bill of rights” banning fracking activities, including the transportation, storage, and disposal of fracking byproducts and the siting of infrastructure that supports fracking. Similar measures in Youngstown and Bowling Green were defeated.[10] Voters in the city of Athens will vote in November 2014 on a proposal to ban fracking and related activities. Court challenges to these “Community Bill of Rights”[11] ordinances have not been filed.

E. California

Following a February 2014 determination by Los Angeles City Council to implement a ban on fracking, similar bans have been instated by the City of Beverly Hills, Santa Cruz County,[12] and the City of Compton. The City of Compton ordinance passed on April 22, 2014, but on July 21, 2014 was challenged by the Western States Petroleum Association, which filed a complaint[13] in Los Angeles County Superior Court, claiming that the ordinance was approved without public comment and that Compton’s ban is preempted by regulations of the California Division of Oil, Gas, and Geothermal Resources (the “Division”) and by SB 4. In related developments, a 45-day moratorium on all drilling operations implemented by the City of Carson on March 19, 2014 expired on May 2, 2014 after an effort to extend the moratorium failed to pass the city council. Further, a bill that would have implemented a state-wide moratorium on fracking at oil and gas fields failed to pass the California Senate in late May 2014.

On June 20, 2014, California Governor Jerry Brown delayed the implementation of stringent new fracking requirements from January 1, 2015 until July 1, 2015. These requirements include technical standards for well construction, fracking water management, groundwater monitoring, and public disclosure of fracking-fluid. The Division released revised proposed regulations on June 13, 2014, following the regulations initially proposed on November 15, 2013. (See OMM January 8, 2014 Client Alert, “California Releases Hydraulic Fracturing Proposed Regulations.”) The revised proposed regulations include a seismicity study requirement and, further, apply the regulations to offshore well-stimulation treatments, while also maintaining the initial requirement that the composition of well-stimulation fluids be disclosed to the Division—regardless of whether the information is claimed as trade secret. The Division is then required to determine whether the information is a protected trade secret.

The Federal Bureau of Land Management (“BLM”) announced that it will resume issuing oil and gas leases on federal land in California, based on a report commissioned by BLM and released on August 28, 2014 by the California Council on Science and Technology. The report concludes that fracking in California will have limited environmental impact, although there may be indirect impacts from production-related activities such as land clearing, construction, general truck traffic, energy operations at the wellheads, water use, and wastewater management. The Center for Biological Diversity issued a press release, claiming that the BLM report discloses “grave risks” associated with fracking and underscores the insufficiency of data collected to date to evaluate the impact of fracking in California. The report is the result of a July 2014 settlement with environmental groups, wherein BLM agreed to conduct an environmental impact study on risks from fracking on federal lands in California.

As discussed in depth in the previous update, in a related development, BLM has been developing best practices for fracking on federal and tribal lands. The BLM published a proposed rule in May 2012 and a revised proposal in May 2013 that requires (i) public disclosure of chemicals used in fracking operations, (ii) confirmation that wells used in fracking operations meet appropriate construction standards, and (iii) plans for managing flowback waters from fracking operations. The revised proposed rule also provides certain trade-secret protections to operators. On August 26, 2014 the White House Office of Budget Management received the final rule for review, which the Obama Administration has indicated will be issued in late fall of 2014.[14]

F. North Carolina

On June 4, 2014, North Carolina Governor Pat McCrory signed into law The Energy Modernization Act, which lifts a state moratorium on fracking that has been in effect since 2012. The new law will allow shale gas exploration permits to be issued in early 2015. The law criminalizes failure to disclose fracking-constituent chemicals per State requirements as a misdemeanor offense. On July 15, 2014, the North Carolina Department of Energy and Natural Resources announced that it will accept public comment through September 15, 2014 on extensive new regulations, including 126 new rules for oil and gas development. The Mining and Energy Commission was charged with reviewing North Carolina’s oil and gas regulations and adopting rules that would “protect public health and safety; protect public and private property; protect and conserve the State’s air, water, and other natural resources; promote economic development and expand employment opportunities; and provide for the productive and efficient development of the State’s oil and gas resources.”

G. New Mexico

In May 2013, Mora County banned fracking within its limits by ordinance, making it the first county in the United States to ban fracking. The Independent Petroleum Association of New Mexico and certain landowners filed a lawsuit in November 2013 in the U.S. District Court in Albuquerque, claiming that the ban is unconstitutional and violates state laws. Specifically, plaintiffs claim that Mora County lacks the authority to pass such an ordinance and that the ordinance threatens to negatively impact property and due process rights, as well as potential revenues for New Mexico schools, universities, and hospitals. See Vermillion, v. Mora County, No. 1:13-cv-01095 (D. N.M. filed Nov. 13, 2013).

On January 10, 2014, SWEPI, LP, a subsidiary of Royal Dutch Shell PLC filed a similar lawsuit in federal court challenging the ban.[15] SWEPI alleges that the ordinance violates the First Amendment, the due process and equal protection clauses of the Fourteenth Amendment (because it unfairly targets corporations), the Commerce Clause, and is preempted by the Supremacy Clause.

H. Texas

In March of 2014, residents in Denton obtained enough signatures to put an initiative on November’s ballot banning fracking within city limits. Denton already requires a 1,200-foot set-back from homes and schools, but the petitioners are seeking an outright ban. On July 16, 2014, the Denton City Council rejected a comparable ban, although a previously implemented moratorium on fracking will remain in place until September 9, 2014.

On December 11, 2013, the city of Dallas passed a fracking well set-back restriction, requiring a buffer of 1,500 feet from any “home, school, church” and certain other areas. Commentators note that this set-back restriction effectively bans fracking within city limits.[16] A natural gas producer whose permit was denied due to this ordinance filed suit[17] alleging breach of contract, fraud, and unconstitutional takings. The City answered on March 9, 2014 with a general denial and certain affirmative defenses and special exceptions. A trial date is set for January 20, 2015.

On July 9, 2014, the U.S. Court of Appeals for the Fifth Circuit issued a decision dismissing a lawsuit brought by the Alabama-Coushatta Tribe of Texas against the United States and various federal agencies asserting that the tribe holds title to 400,000 acres of land upon which the government illegally approved drilling leases. The Fifth Circuit ruled that it lacked jurisdiction because the lawsuit was an impermissible programmatic challenge based on the Supreme Court’s ruling[19] prohibiting “challenges that seek wholesale improvement of an agency’s programs by court decree, rather than through Congress or the agency itself where such changes are normally made.”

On August 22, 2014, the Texas Supreme Court agreed to hear a petition for reversal on a decision by a Texas appeals court in April 2013 dismissing defamation claims filed by Range Resources Corporation against homeowners who accused the company of contaminating their water supply through fracking operations.

I. New Jersey

In January 2012, a one-year ban on fracking was signed into law by Governor Chris Christie, after the New Jersey legislature accepted a conditional veto over legislation that would permanently ban fracking throughout the state. The moratorium expired on January 17, 2013. In September 2012, Governor Christie vetoed legislation that would have banned wastewater generated by fracking from being treated or disposed of in New Jersey. On August 1, 2014 Governor Christie also vetoed a similar bill passed on June 26, 2014 by state lawmakers that would ban fracking wastewater treatment and disposal in New Jersey. As of the publication of this alert, the veto has not been overridden by the state legislature.

Numerous counties and towns in New Jersey have passed resolutions calling for a state wide ban of fracking,[20] but only three to date have passed ordinances banning the practice. In September 2013, the borough of Highland Park, which does not have any known natural-gas deposits, was the first to pass an ordinance banning fracking within its town limits. On October 2, 2013, New Brunswick followed suit.[21] On December 13, 2013, Middlesex County became the first county in New Jersey to ban the practice.[22] While there are no large efforts to drill in New Jersey, portions of Middlesex County sit atop the Newark Basin, which experts believe contains commercial amounts of natural gas,[23] and other portions of the state sit atop the Utica shale.

RAIL TRANSPORTATION

J. New Proposed Rules for Rail Safety

On July 23, 2014, the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) proposed stringent requirements for rail shipments of crude oil, ethanol, and other flammable materials. The proposal follows a series of recent rail accidents involving such materials due in part to the dramatically increased volume of fracking fluids being shipped by rail throughout the U.S. In the notice of proposed rulemaking titled “Hazardous Materials: Enhanced Tank Car Standards and Operational Controls for High-Hazard Flammable Trains,” the PHMSA is proposing and seeking comment on: (1) new operational requirements for certain trains transporting a large volume of Class 3 flammable liquids, including speed limits, braking requirements, and route-related requirements; (2) improvements in tank car standards starting on October 1, 2015, including an increase in tank car shell thickness and a phase out between October 2017 and October 2020 of DOT-111 tank cars, which have been involved in recent derailments (including the July 6, 2013, rail accident in Lac-Mégantic, Quebec, which killed 47 people); and (3) revision of the general requirements for offerors of crude oil to ensure proper classification and characterization of mined gases and liquids. Commentators have noted that the new standards would potentially create a substantial increase in the number of tank cars needed to handle current and projected demand.

In another advance notice of proposed rulemaking, titled “Hazardous Materials: Oil Spill Response Plans for High-Hazard Flammable Trains,” PHMSA would also revise current regulations for comprehensive oil spill response plans to trains carrying high hazard flammable materials. Among the changes, plans would now need to provide measures to respond to worst-case scenarios in connection with discharges resulting from derailments.

The proposed rulemaking follows the issuance on May 7, 2014 of an emergency order by the Department of Transportation requiring all railroads operating trains containing large amounts of Bakken crude oil to notify State Emergency Response Commissions about the operation of these trains through their state, and a safety advisory by the PHMSA urging carriers and offerors of Bakken crude oil to use tank cars with the “highest level of integrity reasonably available within their fleet.”

In a related development, the National Transportation Safety Board issued a report titled “Conrail Freight Train Derailment with Vinyl Chloride Release,” which concluded that logistics issues and lack of training, rather than equipment failures, were responsible for a 2012 train derailment resulting in more than 20,000 gallons of vinyl chloride being released into the Mantua Creek in New Jersey, with damages estimated at $451,000 for equipment and $30 million for emergency response and remediation.

K. Reports issued on Bakken crude volatility

On July 23, 2014, in coordination with the release of the newly proposed regulations for rail safety (see above), PHMSA released a report in which it concluded that crude oil from the Bakken region in North Dakota is generally more volatile and flammable than other crude oil, although it did not recommend changing its classification from a Class 3 flammable liquid.[24] The report was based on an analysis of Bakken crude oil data gathered between August 2013 and May 2014. The report also identifies the increase in volume of Bakken crude as magnifying the safety risks. There has been a 4,000 percent increase in the volume of Bakken crude transported by rail since 2008, when only 9,500 rail-carloads of crude moved through the U.S. compared to 415,000 rail carloads in 2013, with the average crude oil shipment traveling over 1,000 miles prior to arriving at a refinery. The report states that although “Bakken crude is accurate under the current classification system…the crude has a higher gas content, higher vapor pressure, lower flash point and boiling point, and thus a higher degree of volatility than most other crudes in the U.S., which correlates to increased ignitability and flammability.” A study released by the American Fuel & Petrochemical Manufacturers on May 14, 2014 and a study released by the North Dakota Petroleum Council contradicts the PHMSA report, finding that Bakken crude has similar characteristics to other crude oil and is appropriately classified as a Class 3 flammable liquid (as discussed above changing the Class 3 classification that was not proposed by the PHMSA).

L. Canada releases rail safety requirements

On July 2, 2014, Canada released final rail safety regulations to amend the Transportation of Dangerous Goods Regulations. The regulations will increase requirements for the hauling of dangerous goods, including the reduction of speed limits at highly populated areas or near drinking water sources, the implementation of emergency response plans, and requiring greater protection for DOT-111 rail cars. This is the same type of rail car involved in the July 6, 2013 accident in Lac-Mégantic, Quebec that killed 47 people, in which almost half of the 63 DOT-111 cars were found to have damaged shells. The regulations also require consignors to properly classify crude oil via test or lab report, to keep shipping records, and to certify that shipping documents fully and accurately describe the crude oil. Except for the certification requirement, which will take effect on July 15, 2015, all other regulations were implemented on July 15, 2014, but allow a six-month period for industry compliance.

On August 19, 2014, the Transportation Safety Board of Canada released its investigation report in connection with the July 6, 2013 accident in Lac-Mégantic, Quebec. The report listed 18 factors that contributed to the accident, including safety deficiencies in training, oversight, and operational practices. The report found that the operations of the Montreal Maine & Atlantic Railroad Ltd. (“MMAR”), whose assets were subsequently sold in connection with the August 2013 bankruptcy filing by the company, “were indicative of a weak organizational safety culture,” including management’s acceptance of rail wear, inadequate oversight for train securement, and inadequate training for operating crews. The report also found that Transport Canada (“TC”) failed to carry out its objectives of promoting safety for the public, consistently failed in its oversight of MMAR, and despite knowledge of deficiencies in MMAR’s risk management systems, never carried out measures to ensure that MMAR was implementing corrective action plans. The report sets out extensive recommendations for improvement in rail safety and oversight by federal agencies.

CONTROL OF METHANE EMISSIONS

M. Federal developments

On April 15, 2014, the EPA issued five technical white papers for external peer review on the regulation of potentially significant sources of methane emissions in the oil and gas sector, including white papers on compressors, which are identified as increasing GHG emissions during production, processing, transmission, and storage and leaks from wells, related equipment, and pipelines. In August 2014, the EPA released the peer review comments by industry, government, and environmental reviewers, who differed on certain issues, but agreed that the EPA must improve its collection and use of GHG data. Some commentators have been skeptical of the EPA’s ability to solicit public input prior to releasing the proposed regulations, and of whether there is sufficient time to publish such regulations prior to the end of President Obama’s second term. Further, on July 23, 2014, a report was released by several groups finding that there would be significant benefits, both economically and environmentally, in accelerating the repair and replacement of the system of distribution pipelines that deliver natural gas throughout the U.S. The white papers suggest that the EPA will proceed to undertake a methane emissions rulemaking, though it seems doubtful that a final rule could be issued during the current Administration.

In a related development, on July 25, 2014, the Office of the Inspector General release a report titled, “Improvements Needed in EPA Efforts to Address Methane Emissions from Natural Gas Distribution Pipelines.” The report recommends that “(1) EPA work with the Pipeline and Hazardous Materials Safety Administration to address methane leaks from a combined environmental and safety standpoint, (2) develop a strategy to address the financial and policy barriers that hinder reductions from the distribution sector, (3) establish performance goals, (4) track distribution sector emissions and use that data to help determine if future regulation would be appropriate, and (5) assess whether data from ongoing studies should be used to update distribution sector emission factors.”

On July 28, 2014, the Government Accountability Office (“GAO”) released a report in a review of the EPA’s oversight of class II wells. The report examined the roles of both the EPA and states in connection with the class II program, safeguards to protect drinking water, EPA oversight and enforcement of class II programs, and the reliability of program data for reporting. In its report, the GAO recommended that the EPA review emerging risks related to class II wells, revise guidance in order to improve oversight of class II programs, improve data collection methods, and conduct a rulemaking to include state program requirements in federal regulations. The GAO report follows the release in February 2014 of the EPA’s Underground Injection Control program’s Permitting Guidance for Oil and Gas Hydraulic Fracturing Activities Using Diesel Fuels, which provides technical recommendations for protecting underground sources of drinking water from potential endangerment posed by fracking activities where diesel fuels are used, in accordance with the Safe Drinking Water Act (“SDWA”) (See OMM April 1, 2014, Client Alert: Recent Developments Affecting Hydraulic Fracturing Operations.) Commentators have noted that industry officials and environmentalists are at odds as to whether liability extends prior to the release of the guidance in February 2014, with environmentalists considering pursuing citizen suits under SDWA for retroactive claims in connection with unpermitted fracking wells where diesel fuels were used between 2010 and 2014.[25]

On July 29, 2014 the U.S. Department of Energy (“DOE”) announced an “Initiative to Help Modernize Natural Gas Transmission and Distribution Infrastructure” to facilitate control of methane emissions from natural gas infrastructure in the U.S. One such initiative that may have an impact on natural gas prices in the future is the DOE’s plan to establish energy efficiency standards for new natural gas compressor units. However, the DOE has yet to release further details regarding the cost or timeline related to such standards, or whether the standards will be compulsory. In connection with the DOE’s initiative, the Federal Energy Regulatory Commission (“FERC”) may explore funding mechanisms to replace aging pipelines, which could result in an increase to pipeline transportation rates. The DOE also announced several incentive-based initiatives to modernize natural gas infrastructure, promote new technologies to help detect and measure methane leaks, and to facilitate the sharing of information between stakeholders in connection with the effort to reduce methane emissions, which could offset some of the potential increased costs.

In April 2012, the Environmental Protection Agency (“EPA”) adopted final regulations under the Clean Air Act that will take effect on January 1, 2015, creating national standards to reduce air pollution created by fracking and other oil and gas operations. The regulations will require natural gas well operators to implement green completions: technology that allows for the capture and treatment of volatile organic compounds that escape during the fracking process, which can thereafter be sold. On July 17, 2014, the EPA published a proposed rule announcing proposed amendments and clarifications in regards to the new standards. The EPA requested comment on a limited set of issues, including clarification on requirements for well completions, a determination of potential emissions from storage vessels that employ vapor recovery, for thief hatches, for storage vessels that are removed from service, for emissions leak detection requirements at small natural gas plants located on the Alaskan North Slope, and as to leak detection requirements for certain equipment. Significantly, the EPA also proposed deletion of affirmative defenses for exceedances during startup, shut down, and malfunction provisions of the 2012 final rule. Several states have implemented regulations in connection with methane emissions, as more fully discussed below.

N. State developments

The Ohio Environmental Protection Agency issued new rules in April 2014 regulating releases of fugitive methane gas from valves, connectors, and other drilling equipment related to unconventional oil and gas well operations (emissions that are not covered under the Clean Air Act). Oil and gas operators in Ohio will be required to scan equipment with a hydrocarbon detection device, such as an infrared camera, four times per year, will have five days to fix a leak once identified, and will be required to submit annual reports describing leak detection and repair activities. Similarly, in February 2014, the Colorado Air Quality Control Commission passed similar regulations implementing a leak detection and repair program requiring certain equipment retrofits, and mandating various maintenance activities.

In May 2014, the Wyoming Department of Environmental Quality released draft rules aimed at limiting emissions of methane gas from oil and natural gas operations specifically in the Upper Green River Basin. The Basin is a nonattainment area under the Clean Air Act, based on ozone levels that exceed National Ambient Air Quality Standards.[26]

On July 2, 2014, the North Dakota Industrial Commission (“NDIC”) announced a policy establishing oil production limits that will be triggered if producers fail to meet gas capture requirements at the well site. On June 1, 2014, the NDIC adopted rules based on a plan released in March 2014 that resulted from increased pressure due to lawsuits from mineral estate owners challenging the flaring of natural gas (as wasteful, not environmentally harmful).[27] The new rules will require companies filing permit applications to provide gas capture plans and to submit affidavits that they have provided their capture plans to all natural gas-gathering companies working in the area. The NDIC has set goals of incrementally reducing flaring with a reduction of 26% by the end of 2014, and 10% percent (with the potential for 5%) by the end of 2020.

On August 27, 2014 the California legislature passed a bill that would direct the Public Utilities Commission to commence proceedings by January 15, 2015 to adopt rules in order to implement a strategy for identifying and repairing methane leaks from natural gas pipelines. The bill, if signed into law by Governor Brown, would also require gas companies to file a report as soon as possible to include a summary of utility leak management practices, a list of new methane leaks in 2013 by grade, a list of open leaks that are being monitored or are scheduled to be repaired, and an estimate of gas loss due to such leaks.

OTHER DEVELOPMENTS

I. STATE

O. States implement seismic studies

On June 24, 2014, the Colorado Oil & Gas Conservation Commission suspended fracking operations in Weld County, Colorado to determine whether the injection well activities were tied to seismic activity. Among other actions, a monitoring team is investigating whether a 2.6 magnitude earthquake on June 23rd and a 3.4 magnitude earthquake on May 31st are related to fracking activities in the state.

On April 14, the Ohio Department of Natural Resources announced it will be imposing new drilling permit conditions for horizontal drilling located within three miles of a known fault or area of seismic activity greater than a 2.0 magnitude. These new permits would require the installation of seismic monitors by operators. In the event that such monitors detect a seismic event in excess of 1.0 Richter magnitude, fracking operations would be suspended while an investigation is undertaken. If a probable connection to fracking is established, then all fracking operations will be suspended. The permit criteria and conditions have yet to be released.

On August 12, 2014, the Texas Railroad Commission (“TRRC”) proposed amendments to regulations for fracking injection wells that give the TRRC the power to modify, suspend, or terminate a permit for saltwater or other oil and gas waste disposal “suspected of or shown to be causing seismic activity.” Under the proposed regulations, disposal well permit applicants will be required to provide information from the U.S. Geological Survey (“USGS”) regarding the locations of historical seismic events and may be required to provide information “such as logs, geologic cross-sections, and/or structure maps,” with such information estimated to cost applicants an additional $300 per disposal well permit. Public comments on the proposed regulations will be accepted by the TRRC until September 29, 2014.

As noted above, new proposed regulations in California would require tracking of seismic activity in relation to fracking wells, and require evaluations as to the cause of an earthquake with a of magnitude 2.0 that takes place near a fracking well.

A recent report and paper by the USGS links an increase in the frequency and magnitude of earthquakes to drilling for oil and gas, including a magnitude 5.0 earthquake and a magnitude 5.7 earthquake that occurred near Prague, Oklahoma. However, on August 19, 2014, a geophysicist with the USGS published a study in the “Bulletin of the Seismological Society of America” finding that earthquakes and tremors from fracking operations are less intense than naturally occurring earthquakes of the same magnitude, thereby causing less damage.[28]

On August 4, 2014, a resident of Prague filed a complaint against 27 energy companies[29] in a state District Court, claiming that her severe injuries were the direct result of fracking operations in Central Oklahoma carried out by the defendants. The plaintiff argues that the fracking operations caused a series of earthquakes in 2011, each with magnitudes over 5.0, one of which resulted in a structure collapsing on the plaintiff and causing severe injuries. The lawsuit cites the USGS report discussed above, as well as a study published on July 4, 2014 in the journal Science, which found a likely correlation between wastewater injection operations and the occurrence of earthquakes in Oklahoma. To date, litigation related to seismic activity caused by fracking operations is rare, although in August 2013 a confidential settlement was approved by a federal court in connection with claims[30] by homeowners that fracking operations caused earthquakes in Arkansas which resulted in damage to plaintiffs’ property.

P. Water Supply

Several states have experienced increasing drought conditions that have resulted in the possibility of new water use regulations in fracking operations. During a severe drought in 2011, several water districts in Texas placed certain water use restrictions on fracking operations, including the city of Barnett Shale, Texas, which banned the use of city water for fracking.[31] Although no water-specific legislation has passed in California, water issues were raised in relation to the various bans and moratoriums (see discussion above). The issue has become enough of a concern that the Western States Petroleum Association published a fact sheet titled “Setting the Record Straight: Water and Hydraulic Fracturing in California,” in order to present the fracking operators’ view, arguing that the average amount of water used in fracking operations in California in 2012 was 116,535 gallons, which is not disproportionate to the 146,000 gallons used by an average family of four, or the 312,000 gallons of water required to irrigate a golf course. A recent report published by the Ceres Investor Network states that nearly half of the wells hydraulically fractured since 2011 were in regions with high or extremely high water stress, and over 55% were in areas experiencing drought, which could lead to future water regulations in connection with fracking. On the other hand, some commentators note that enhanced gas production from fracking should serve to provide for a net reduction in water use, since the same will supplant more water intensive coal-fired power plants.[32] Operators have also increased implementation of water recycling methods in conjunction with fracking operations. According to one study, operators in Texas currently only recycle approximately 5% of the water used during fracking operations.[33]

Q. Michigan Court upholds State permit denial

On July 2, 2014, the Michigan Court of Appeals unanimously upheld determinations of the Department of Environmental Quality denying fracking permit applications. The applicants had sought to drill wells on private land surrounding the Pigeon River County State Forest. The Court found that the plain language of the Natural Resources and Environmental Protection Act and a relevant consent order supported the denial of the permits based on their location in no-drill zones and several wells’ proximity to water.

R. Rules released under the Illinois Hydraulic Fracturing Regulatory Act

On August 29, 2014, the Illinois Department of Natural Resources issued final rules to implement the Hydraulic Fracturing Regulatory Act (“HFRA”), which strengthen public disclosure requirements in connection with water volume and fracking chemicals used during fracking operations, clarify rules protecting the ability of the public to comment during the fracking permit approval and modification process, provide for additional safety and oversight in connection with fracking wells, significantly increase enforcement penalties for administrative violations under the HFRA, expand rules to cover additional fracking technologies, and increase regulations on the use of flaring. The revised rules were submitted to the Illinois General Assembly’s Joint Committee on Administrative Rules for an additional public notice period, with a deadline of November 15, 2014 for final rules to be adopted.

S. Lawsuit filed to stop fracking in Utah National Forest

In May 2014, WildEarth Guardians filed a complaint in the U.S. District Court of Utah, Central Division, seeking to halt fracking on 400 wells in the Ashley National Forest in Utah for which the United States Forest Service and the BLM issued permits.

T. Texas Lawsuits

On June 19, 2014, a county judge in Texas issued a ruling upholding a $2.9 million jury award against Aruba Petroleum, Inc. (“Aruba”) in favor of plaintiffs, finding the defendant was liable for intentionally creating a public nuisance through its fracking activities. The Court rejected, however, allegations that the company acted with malice, thereby rejecting plaintiffs’ claim for exemplary damages. In August 2014, Aruba filed a motion for judgment NOV, claiming jury misconduct and that the verdict was excessive. In May 2014, another Texas jury held Chesapeake Operating, Inc. liable for creating a temporary private nuisance through its fracking operations, awarding $20,000 to plaintiffs.[34] Aruba claims the vast difference between the amounts of the awards is proof that the $2.9 million verdict should be overturned. Commentators note that these results could encourage further nuisance lawsuits in connection with fracking operations.

II. FEDERAL

U. EPA disclosure regulations

On May 19, 2014, the EPA published an Advanced Notice of Proposed Rulemaking under Section 8 of the Toxic Substances Control Act (“TSCA”), seeking public comment on requirements for disclosure of fracking chemicals and mixtures, health risks, suggested methods for reporting this information, and on incentives and recognition mechanisms that could support the development and use of safer fracking methods. The public comment period set to end on August 18, 2014, was extended until September 18, 2014. Industry groups oppose the proposal, noting that the FracFocus, on-line system already provides for public disclosure of fracking fluid constituents. Environmentalists groups, however, assert that FracFocus is ineffective and should be replaced by regulation under TSCAFracFocus was created in April 2011, by a consortium of state groundwater regulators the Interstate Oil and Gas Conservation Commission and the Ground Water Protection Council. With improvements implemented beginning June 1, 2013, search functions include access via chemical name, CAS number, and well location, together with improved mechanisms to assure submission to state authorities. Currently, ten states—Colorado, Oklahoma, Louisiana, Texas, North Dakota, Montana, Mississippi, Utah, Ohio, and Pennsylvania—use FracFocus.

On March 5, 2014, an advisory panel to the DOE comprised of representatives from industry, environmental groups, and academia reported that while FracFocus had improved public disclosures, there were still too many trade secret exemptions being claimed. The panel recommended that “all known constituents” with limited exemptions should be disclosed with the goal to “have very few trade secret exemption claims from disclosure.” The panel acknowledged the public concern about the nature of the chemicals used in hydraulic fracturing and that “[i]t is much to industry’s advantage to meet this concern.”

In April 2014, Baker Hughes Inc. announced that it would voluntarily disclose, through FracFocus, the chemical ingredients in the fluids used during the company’s fracking operations. Currently, over 200 operators voluntarily disclose the ingredients utilized in their fracking fluids through FracFocus. According to the company, “Baker Hughes is implementing a new format…[by] providing complete lists of the products and chemical ingredients used.”

V. D.C. Circuit dismisses challenge to FERC pipeline determination

On July 1, 2014, the D.C. Circuit dismissed consolidated petitions against FERC brought by environmental groups claiming that FERC erred in not allowing the public to comment on environmental studies submitted by the natural-gas industry in support of a $1.2 billion pipeline extension carrying natural gas into New York City from Linden, New Jersey (No Gas Pipeline, Sierra Club, And Food & Water Watch v. FERC, Nos. 12-1470, et al). The D.C. Circuit found that the claim was related to the Budget Act, over which the court lacked original jurisdiction, and that Jersey City did not target any aspect of FERC’s actual decision or argue that FERC’s decision-making process was tainted by bias or impropriety. Environmental groups challenging FERC’s action claim that reports about the pipeline were never open to public comment, contrary to FERC requirements. FERC approved the project in May 2012, finding that its environmental effects would be minimal.

II. INTERNATIONAL JURISDICTIONS

W. Canada

In Alberta, oil and gas operators will likely be subject to new wildlife-based migration and calving restrictions for woodland caribou. Alberta has a woodland caribou policy intended to stabilize, recover, and sustain caribou populations. The policy includes ongoing caribou management efforts such as population and habitat monitoring, predator management, habitat restoration, and effective mitigation of industrial activities. As such, all oil and gas drilling activities are closely regulated, and licensees are required to abide by any conditions imposed pursuant to the woodland caribou policy, which include the requirement for licensees to develop and implement a caribou protection plan for all new exploration and construction activities.

In July 2014, the Canadian government released a notice announcing the addition of certain chemicals that oil and gas operators will be required to report under the National Pollutant Release Inventory, but no changes were made in connection with the reporting of substances used in fracking operations, which continue to be exempted from disclosure under the law.

On August 28, 2014, the Nova Scotia Independent Panel on Hydraulic Fracturing released a report finding that, although fracking would provide major economic and employment benefits to the province, Nova Scotia does not have the necessary information required to make a final decision on whether to allow fracking in the province. The report found that many questions about fracking remain outstanding, and that municipalities, citizens, Aboriginal governments, and communities should be involved in the risk-assessment and decision-making process, and that the report should be used as a basis for informed debate on the issue of fracking in Nova Scotia. The report recommends that such stakeholders “spend whatever time is necessary learning about these issues, keeping an open mind of future developments, and research and engaging with the possibilities as well as the risk of [fracking].” The report also recommends 32 general and specific recommendations “to safeguard community health, local economies, ecosystem health, and the environment,” in the event that the province moves forward with fracking development.

X. United Kingdom

The Department of Energy and Climate Change announced a proposal in May 2014 that communities will receive payments from fracking operators of approximately EU 20,000 for each lateral well located at fracking sites. The compensation will be provided for wells above a depth of 300 meters and wells that extend more than 200 meters laterally. The average payment is expected to equal EU 800,000, and the payments will be in addition to communities receiving 1% of revenues from any successful well.

In August 2014, U.K. lawmakers proposed amendments to fracking regulations that would require well-by-well disclosure of fracking fluids, baseline monitoring of methane levels in the groundwater, and environmental impact assessments for all fracking sites.[35]

Y. European Union

On January 22, 2014, the European Commission issued non-binding guidelines for fracking, asking EU members to apply proposed principles to fracking legislation within each member state, although the guidelines also do not prevent member states from imposing a ban on fracking. Both France and Spain implemented bans in 2013 (see OMM April 1, 2014, Client Alert: Recent Developments Affecting Hydraulic Fracturing Operations), and in July 2014, several government officials proposed a seven-year ban in Germany.

The European Commission states that every member nation will be asked to produce a scorecard within six months in order to disclose which principles have been implemented, and the European Commission will reassess the option of passing legally binding rules within 18 months depending on the impact of the voluntary guidelines. The guidelines include recommendations in connection with monitoring of fracking fluids, assessments of sites where fracking operations will take place, restrictions in flood zones and areas prone to earthquakes, and monitoring of methane emissions.

Z. Brazil

In August 2014, a bill was introduced in Brazil’s legislature that would impose a five-year ban on fracking in Brazil, provide additional time to study the potential environmental impacts of fracking, and establish licensing rules to prevent environmental damage from fracking operations. Concern has been expressed by environmentalists and scientists about the risk of groundwater contamination, especially near the Guarani Aquifer, one of the world’s largest groundwater reservoirs. A vote on the proposed legislation could be held by the Environment and Sustainable Development Committee in November, and by the full legislature sometime next year.[36]

This Alert is provided for information purposes only and does not reflect an opinion of the Firm.

[1] N.Y. Environmental Conservation Law Sec. 23-0303 (McKinney’s 2012).
[2] Wallach v. N.Y. State Dep’t of Envtl. Conservation, No. 6773-2013 (N.Y. Sup. Ct., Jul. 11, 2014); Joint Landowners Coal. of New York Inc. v. Cuomo, No. 843-2014 (N.Y. Sup. Ct., Jul. 11, 2014), available here.
[3] Beardslee v. Inflection Energy, No. 12‐4897 (2nd Cir. 2014).
[4] The Oil and Gas Conservation Act. Colo. Rev. Stat. Sec. 34-60-102.
[5] Mitchell Byars, Lafayette residents sue state, Gov. Hickenlooper seeking enforcement of city’s fracking ban, Lafayette News, June 10, 2014, available here; see also Community Environmental Legal Defense Fund, Fracking: Class Action Lawsuit Filed Against Gas Industry/State of Colorado, Press Release, available here.
[6] The Boulder initiative extended a one-year moratorium on all oil and gas exploration for an additional four years, while the Broomfield measure prohibits fracking and certain storage of associated waste for five years. The Lafayette ordinance permanently bans all oil and gas extraction from new wells; the depositing, storing, and transportation of byproducts of oil and gas extraction; the extraction of water for use in oil and gas extraction; and the creation and delivery of infrastructures that facilitate activities related to the extraction of gas and oil.
[7] Pa. Oil & Gas Act of Feb. 14, 2012, No. 13 (“Act 13”), 58 Pa. Cons. Stat. §§ 2301-3504 (2012).
[8] Robinson Twp. v. Commonwealth of Pennsylvania, 83 A. 3d 901 (Pa. 2013)
[9] The Youngstown community bill of rights measure was defeated for the third time in a period of 12 months after a vote took place on May 6, 2014.
[10] Bowling Green is in northwest Ohio, and currently no drilling is taking place there.
[11] These types of ordinances are frequently referred to as the CELDF-Bill of Rights. CELDF is the community environmental legal defense fund that prepared a model draft of this ordinance and encourages local cities to adopt its passage.
[12] There are no known oil leases or prospects in Santa Cruz County.
[13] W. States Petroleum Ass’n v. City of Compton, Cal. No. BC552272 (Super. Ct., Jul. 21, 2014).
[14]
[14] Alan Kovski, Final Rule to Update Fracking Regulations On Federal Lands Sent to OMB by BLM, Bloomberg BNA: Daily Environmental Report, August 29, 2014.
[15] SWEPI LP v. Mora County, No. 14-cv-00035 (D. N.M. filed Jan. 10, 2014).
[16] RT.com: City of Dallas Effectively Bans Fracking (Dec. 13, 2013), http://rt.com/usa/dallas-passes-fracking-restrictions-178/.
[17] Trinity East Energy, LLC v. City of Dallas, No. DC-14-01443 (Tex. Dist. Ct., Dallas Cty, filed Feb. 13, 2014, available here.
[18] See also Samantha Blons, Battle Over Fracking in Dallas Continues With Takings Lawsuit, Energy Center: Univ. Tex. Austin Law, available here.
[19] Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 882 (1990).
[20] See Food & Water Watch, Local Actions Against Fracking: Passed Actions (2014), available here.
[21] Brian Amaral, Another Middlesex County Town Bans Fracking, N.J.com (Oct. 3, 2013), available here.  
[22] Chip Northrup, NJ County Bans Fracking, No Fracking Way, (Dec. 22, 2013), available here.
[23] James M. O’Neill, Is Fracking In New Jersey’s Future?, NorthJersey.com (Aug 1 2013), available here.
[24] 49 CFR § 173.120
[25] Industry Advocates Spar Over Reach Of Retroactive Diesel Fracking Suits, Inside EPA, August 22, 2014.
[26] The EPA has promulgated NAAQS for six pollutants: carbon monoxide, lead, nitrogen dioxide, ozone, particulate matter (as particles less than 10 microns and particles less than 2.5 microns), and sulfur dioxide.
[27] Mark Wolski, North Dakota Industrial Commission Adopts Plan to Reduce Natural Gas Flaring, Bloomberg BNA: Daily Environmental Report, March 5, 2014.
[28] Bebe Raupe, Earthquakes Associated With Fracking Less Intense, USGS Researcher Says, Bloomberg BNA: Daily Environmental Report, August 19, 2014.
[29] The complaint was filed against New Dominion, LLC; Spess Oil Company; and John Does 1-25.
[30] Hearn v. BHP Billiton Petroleum (Fayetteville) LLC et al., 4:11-CV-0474 (E.D. Ark. Jun. 9, 2011).
[31] Mike Lee, “Parched Texans Impose Water-Use Limits for Fracking Gas Wells,” Bloomberg Businessweek, October 6, 2011, available here.
[32] Pacsi, Adam Philip, et al. “Spatial and temporal impacts on water consumption in Texas from shale gas development and use.” ACS Sustainable Chemistry & Engineering (2014).
[33] Forrest Wilder, Study: In Midst of Drought, Fracking Industry Does Little to Recycle Water, Texas Observer, February 4, 2014.
[34] Crowder v. Chesapeake Operating, Inc., No. 2011-008169-3 (County Court at Law No. 3, Tarrant
County, Texas, Nov. 7, 2011).
[35] Nidaa Bakhsh, U.K. Lawmakers Seek to Tighten Shale Gas Rules, Including Fluids Disclosure, Monitoring, Bloomberg BNA: Daily Environmental Report, August 26, 2014.
[36] Michael Kepp, Brazil’s Legislature Considers Five-Year Fracking Ban to Study Environmental Impact, Monitoring, Bloomberg BNA: Daily Environmental Report, August 27, 2014.


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