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Recent Developments Affecting Hydraulic Fracturing Operations

April 1, 2014

 

This is a further update to our coverage on law, regulation and policy affecting hydraulic fracturing (“fracking”) operations. Our last installment was issued June 11, 2013 and may be found here. As previously reported, the continued delay in comprehensive federal regulation of fracking has led to a burgeoning, and disparate, array of local and state efforts to regulate (or ban) hydraulic fracturing. Below we discuss state and local bans on fracking operations, various regulatory developments at the state and federal level, and recent cases impacting the regulation of the industry.

BANS ON FRACKING OPERATIONS

Various state and local authorities have considered or implemented regional or partial bans or moratoria on fracking operations. Recently, several actions have been brought in state courts to challenge such enactments. These challenges typically claim that the bans are either preempted by that state’s oil and gas regulations or are unconstitutional takings and breaches of contract. Three cases have reached their respective high courts. A few weeks ago, Pennsylvania’s high court refused to reconsider its ruling in favor of local municipalities. New York’s and Ohio’s highest courts are expected to issue their determinations about the legality of municipal actions banning or imposing restrictions on oil and gas developments this spring. Additionally, we include a small discussion of bans that have been implemented in jurisdictions outside the United States. The following provides detailed discussions for recent developments by region and states.

I. NORTHEASTERN STATES: THE MARCELLUS, UTICA, AND NEWARK BASIN SHALES

        A. Vermont

Vermont is the only state that has effectuated a permanent ban on fracking and the importation and storage of fracking wastewater. See Act 152, signed into law in May 2012. The fracking ban is largely symbolic given Vermont’s limited potential for natural gas development in the state, and is likely the reason that the Act has not been challenged on constitutionality grounds. The Act also requires further investigation into the environmental and health impacts of fracking to determine whether to repeal the ban on fracking. That report is due January 15, 2016.

        B. New Jersey

New Jersey is the only other state that has attempted to ban fracking. 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 to legislation that would have permanently banned fracking throughout the state. The moratorium expired on January 17, 2013. In September 2012, Governor Christie also vetoed legislation that would have banned wastewater generated by fracking from being treated or disposed of in New Jersey. On January 10, 2014, lawmakers again introduced a bill banning fracking wastewater treatment and disposal in New Jersey. Senate Bill 1041 was reported out of committee with amendments on March 17, 2014.

Numerous counties and towns in New Jersey have passed resolutions calling for a state wide ban of fracking,[1] 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.[2] On December 13, 2013, Middlesex County became the first county in New Jersey to ban the practice.[3] 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,[4] and other portions of the state sit atop the Utica shale. 

        C. New York

Five years ago, New York placed a state-wide moratorium on fracking pending the results from that state’s environmental agency’s review on hydraulic fracking. Frustrated by the delay, the Joint Landowners Coalition of New York, which represents New York property owners in favor of fracking in New York, filed an Article 78 Complaint on February 14, 2014 asking an Albany judge to compel the New York Department of Environmental Conservation to issue a final Supplemental Generic Environmental Impact Statement. The landowners claim that the delay has caused a negative business reputation for New York State, 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.

This is the second complaint filed that challenges the delay as unreasonable. On December 17, 2013, the bankruptcy trustee of an energy company that sustained substantial losses awaiting New York to lift its moratorium filed an Article 78 Complaint asking to compel officials to finalize the environmental and health review of fracking. The New York Department of Environmental Conservation filed a motion to dismiss the petition on March 7, 2014. The return date on this petition is May 6, 2014.

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. And this number continues to grow. On January 6, 2014, Kirkland banned fracking within the town limits; on January 10, 2014, Erie County followed suit, banning fracking on county-owned lands under the home-rule doctrine. The ability of municipalities to rely on the home-rule doctrine as authority to ban fracking is the subject of appeal in Norse Energy Corp. USA v. Town of Dryden, currently pending before the New York Court of Appeals.[5]

In Norse Energy, a New York trial court upheld the Town of Dryden’s amendment to its local zoning ordinance banning all activities related to natural gas and petroleum exploration, production or storage under the state’s home-rule doctrine.[6] Norse Energy appealed that ruling arguing that the town’s zoning ordinance was preempted by New York State’s Oil, Gas, and Solution Mining Law, which “supercede[s] all local laws or ordinances relating to the regulation of oil, gas and solution mining industries.”[7] The appellate panel disagreed and found that the zoning ordinance “simply establishes permissible and prohibited uses of land,” and does not “regulate” the details or procedures of the oil, gas or solution-mining industries.”[8] Norse Energy appealed that ruling to New York’s highest court. Final briefs were filed with the New York Court of Appeals on January 6, 2014, with oral argument scheduled for June 3, 2014.

If the high court upholds the home-rule doctrine, conducting fracking operations in New York will be exceedingly difficult, if not impossible. Additionally, other cities in states that have home-rule doctrines enshrined in their constitutions, like California, will likely use any affirmative ruling to galvanize local efforts to ban drilling in those states. 

        D. Pennsylvania

Pennsylvania, unlike its neighboring states, has embraced fracking operations at the state level. 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 requiring “statewide uniformity among local zoning ordinances with respect to the development of oil and gas resources.”[9] The Act was challenged, but upheld at the appellate level.[10] On December 19, 2013, the Pennsylvania Supreme Court struck down provisions of the Act as unconstitutional. See Robinson Twp. v. Commonwealth of Pennsylvania, 83 A. 3d 901 (Pa. 2013). The majority held that provisions of Act 13 unconstitutionally restricted the power of municipalities to govern gas drilling in their jurisdictions in violation of Section 27 of the Declaration of Rights in the Pennsylvania Constitution. In February 2014, the Pennsylvania Supreme Court denied the administration’s request for reconsideration.[11]

It is unclear whether this ruling will substantially alter hydraulic fracking operations in Pennsylvania since the practice was flourishing under local rule prior to Act 13’s passage. Industry groups have taken the position that the ruling prevents state regulators from enacting the proposed rules governing surface operations at and around drilling sites. Those regulations, among other things, impose certain requirements for freshwater impoundments, as well as improvements to well water quality near fracking locations.

        E. Ohio

Eastern Ohio sits atop the Utica Shale and portions of the Marcellus Shale basins. On November 4, 2013, the town of Oberlin, Ohio, 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 Bowling Green and Youngstown, Ohio, were defeated. Citizens in Youngstown, however, will get a third opportunity to vote on the community bill of rights on May 6, 2014 after supporters were able to gather enough signatures to put the issue on yet another ballot.[12] Voters in the city of Athens, Ohio, will vote in November 2014 on a proposal to ban fracking and related activities. Court challenges to these “Community Bill of Rights”[13] ordinances have not been filed.

A case pending before Ohio’s Supreme Court may impact the constitutionality of these bans. As background, the City of Munroe Falls initially sought injunctive relief against Beck Energy Company for failing to comply with certain general, and 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 the injunction, finding that Ohio’s Revised Code § 1509.02, which 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,” preempted local ordinances to the extent that they sought to regulate drilling activities.[14] The City of Munroe Falls appealed.

On appeal, the City argues that its “home-rule” authority granted under Ohio’s Constitution[15] 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.[16] Many Ohio cities and health professionals filed amicus briefs in support of the City.[17] APIA and other energy-producing companies operating in Ohio filed amicus briefs in support of the appellate court’s decision.[18] Oral argument was heard on February 26, 2014, but to date no decision has been announced.

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, though, similar to what was seen in response to the City of Dallas’s restrictive zoning ordinance. 

        F. Washington, D.C.

On March 5, 2014, lawmakers in Washington, D.C. unanimously passed a resolution expressing their conclusion that the U.S. Forest Service should prohibit hydraulic fracturing in nearby national forest land due to concerns that fracking in the Potomac River watershed could contaminate the city’s drinking water.[19] The Forest Service is in the process of updating its Forest Land and Resource Management for the area and is considering possibly mining the Marcellus Shale by fracking. The resolution, while not binding on the Forest Service, will be considered by the Forest Service as it develops its plan for the region.

The Council of the District of Columbia urged the federal government to make sure that no drilling takes place in George Washington National Forest, half of which includes the natural gas-rich Marcellus Shale geological formation in Virginia and West Virginia.

II. MIDWEST STATES: ANTRIM AND NEW ALBANY SHALES[20]

        A. Illinois

On May 31, 2013, fracking regulations were passed in the state, beating out other legislation that sought to impose a two-year fracking moratorium to assess the environmental and health risks.[21] Only one city in Illinois has banned fracking within its city limits.[22] Illinois sits atop the New Albany Shale.

        B. Michigan

Numerous counties and cities in Michigan have passed resolutions calling for a statewide ban of fracking[23] after the state auctioned 100,000 acres of public land to oil and gas developers in May of 2012.[24] Efforts to get a citizen-led initiative to ban fracking on the 2014 statewide ballot were recently shelved until 2015 because the effort only gathered 70,000 of the 250,000 signatures required to get the initiative on the ballot.[25] Michigan sits atop of the Antrim Shale.

III. WESTERN STATES: NIOBRARA, PIERRE, SAN JUAN BASIN, AND MONTEREY SHALES

        A. Colorado

On November 4, 2013, the town of Lafayette, Colorado, voted to permanently ban all new fracking operations inside its city limits, while the towns of Boulder, Broomfield and Fort Collins, Colorado, voted to enact or extend temporary moratoria.[26] Challenges to the restrictions in Lafayette[27] and Fort Collins[28] were filed as separate actions on December 3, 2013 and are pending in Colorado state courts. 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. 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. A similar challenge is pending against an ordinance passed in 2012 by the city of Longmont, Colorado, banning fracking operations and the disposal of associated waste within the city limits.[29] A citizens group hopes to place a proposed amendment to Colorado’s constitution on the November 2014 ballot that would give municipalities the power to ban or restrict fracking operations. 

        B. California

The Los Angeles City Council unanimously voted to take action towards implementing a ban on fracking on February 28, 2014.[30] The approved resolution requires the city attorney to “present an ordinance to change the zoning code to prohibit all activity associated with well stimulation, including, but not limited to, hydraulic fracturing, gravel packing, and acidizing…and the use of waste disposal injection wells in the City of Los Angeles.” The resolution states that the proposed ban would remain in effect until satisfactory state and federal regulations are in place; until the City Council is assured of the long-term safety, security and reliability of its water supplies and the health and safety of its citizens, including potential impacts from seismic events related to fracking operations; and until the City Council is assured that companies engaging in fracking activities can mitigate the effects on climate change and protect the environmental quality and natural resources of Los Angeles. Once the zoning ordinance has been prepared, it will be returned to the City Council for a final vote.

On March 19, 2014, the city of Carson placed a 45-day moratorium on all drilling operations out of concern about the potential use of hydraulic fracking on wells within its city limits.[31] Occidental Petroleum planned to drill more than 200 wells in the area and promised not to use hydraulic fracking in its operations. The residents sought the moratorium out of concern that Occidental would not hold to that promise. More than 600 wells have been drilled in the Dominguez field in Carson, which has produced more than 270 million barrels of oil since its discovery in 1923. 

        C. New Mexico

In May 2013, Mora County, New Mexico, banned fracking within its limits by ordinance, claiming it had self-governance authority to protect natural resources and water rights from corporate exploitation.[32] The ordinance established that citizens have a right to a safe and clean environment, and made Mora 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, 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.[33] 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.

IV. SOUTHERN STATES: BARNET, FAYETTEVILLE AND HAYNESVILLE SHALES

        A. Texas

For the most part, Texas cities embrace the Barnett Shale fracking boom. But as drilling encroaches further into urban areas, local opposition grows. On December 11, 2013, the city of Dallas passed restrictions on hydraulic fracking that require that any fracking well be set-back 1,500 feet from any “home, school, church” and other areas. Many argue that this restriction effectively bans the practice within the densely populated city.[34] A natural gas producer whose permit was denied due to this ordinance filed suit alleging breach of contract, fraud and unconstitutional takings. Trinity East Energy, LLC v. City of Dallas, No. DC-14-01443 (Tex. Dist. Ct., Dallas Cty, filed Feb. 13, 2014 ).[35] The City answered on March 9, 2014 with a general denial and certain affirmative defenses and special exceptions. The hearing on the City’s special exceptions (e.g., failure to plead sufficient facts showing immunity waiver, fraud, etc.) is scheduled for April 3, 2014.

Additionally, in March of 2014, residents in Denton, TX obtained enough signatures to put an initiative on November’s ballot banning fracking within city limits.[36] Denton already requires a 1,200 foot setback from homes and schools, but the petitioners are seeking an outright ban.

        B. Arkansas

Like Texas, Arkansas cities embrace the fracking boom. Fracking disposal wells, however, were causing substantial earthquakes in and around Conway, Arkansas. Due to this, in late July of 2011, the Arkansas’ Oil and Gas Commission banned fracking wastewater disposal wells within a 1,150-square-mile area north of Conway in the Fayetteville Shale region.[37]

V. INTERNATIONAL JURISDICTIONS

        A. Canada

On September 6, 2013, Canadian energy company Lone Pine initiated arbitration under the North American Free Trade Agreement (“NAFTA”) rules against the Government of Canada by filing a Notice of Arbitration. See Notice of Arbitration, Lone Pine Resources Inc. v. Canada. Lone Pine is seeking $250 million from the Canadian government, alleging that Quebec’s June 2011 moratorium on fracking—which prohibits all oil and gas activities in the bed of the St. Lawrence River, pending further study—amounts to an illegal revocation of the company’s right to mine for oil and gas. The headquarters of Lone Pine is located in Calgary but, because the corporation is incorporated in Delaware, Lone Pine has the power under NAFTA to challenge Quebec’s fracking moratorium. NAFTA’s Chapter 11 dispute-resolution provisions give foreign corporations the right to sue the governments of Canada, the U.S. or Mexico if the corporation alleges that its economic rights as a foreign investor have been harmed.

        B. Spain

Lawmakers in Spain’s northern Cantabria region unanimously voted in April 2013 to ban fracking because of environmental concerns, despite indications that Spain has large shale reserves, is battling a recession and high employment, and imports approximately 76 percent of its energy.

        C. France

In October 2013, France’s highest court, the Constitutional Council, upheld a government ban on fracking, which was challenged by Schuepbach Energy, an American company whose exploration permits were revoked after the French Parliament banned the practice. The company claimed that the law violated its rights and was unconstitutional.

REGULATORY DEVELOPMENTS

I. FEDERAL

        A. EPA Releases Final Permitting Guidance for Oil and Gas Fracking Activities Using Diesel Fuels

In February 2014, the Environmental Protection Agency (“EPA”) finalized its Underground Injection Control (“UIC”) program’s Permitting Guidance for Oil and Gas Hydraulic Fracturing Activities Using Diesel FuelsDraft guidance was previously released by the EPA in May 2012 (see OMM May 22, 2012, Client Alert: Hydraulic Fracturing Update on EPA Actions). This guidance 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”). The EPA states that it developed the guidance to clarify how companies can comply with Section 322 of the 2005 Energy Policy Act, which exempts fracking operations from the requirement to obtain an UIC permit, except in cases where diesel fuel is used as a fracturing fluid. The final guidance defines “diesel fuels” to include vehicular diesel fuels, diesel fuel oil, heating oil, marine diesel fuel, deodorized kerosene and jet fuel.[38]

The guidance has limited application to federal permitting and enforcement actions because diesel fuel has already been largely phased out of use in fracking, but it is noteworthy as a potential precedent for future policy on other proppants. The EPA has issued the guidance based on its finding that certain diesel fuels may contain a number of chemicals that are highly mobile in ground water and pose risk to human health and the environment, including benzene, toluene, ethylbenzene, and xylene compounds. The EPA has set a maximum contaminant level goal and a maximum contaminant level for these substances under the SDWA. The guidance also states that “although developed specifically for hydraulic fracturing where diesel fuels are used, many of the recommended practices found in this document are consistent with best practices for hydraulic fracturing in general, including those found in state regulations, voluntary standards from the American Petroleum Institute, and model guidelines for hydraulic fracturing developed by industry and stakeholders.”

The EPA will apply the new guidance in connection with its primary permitting authority for UIC programs (including Class II oil- and gas-production wells) in more than a dozen states and regions.[39] See EPA UIC Program Primacy.

        B. BLM Revises Proposed Rule For Fracking on Federal and Tribal Lands

The Bureau of Land Management (“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, with public comments due by August 23, 2013. The revised proposal 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. According to the BLM, “in most cases, the requirements in this rule can be satisfied by submitting additional information during the existing [approval] process.” The BLM estimates that the industry-wide cost to comply with the proposed rule is between $12 million and $20 million per year.

On March 25, 2014, the DOI announced that the proposed rule is expected to be finalized by the end of 2014. The proposed rule has been criticized by environmental groups for not doing enough to protect water supplies, with various of these groups offering alternate proposals, including the extreme position of prohibiting all fracking on public and tribal lands until the EPA completes its study regarding the potential impacts of fracking on drinking-water resources. 

        C. TSCA Significant New-Use Rule Connected to Fracking

On May 9, 2013, the EPA published a Direct Final Rule (the “Rule”) pursuant to the Toxic Substances Control Act (“TSCA”) significant new-use rules (“SNUR”) establishing significant new-use and recordkeeping requirements for 15 chemical substances, some of which are commonly used in fracking operations, and requiring companies to submit data on the environmental and health effects of these chemicals. The action requires persons who intend to manufacture, import, or process any of the 15 chemical substances to notify the EPA at least 90 days before commencing that activity so that the EPA can evaluate the intended use and determine whether to prohibit or limit the activity before it occurs.

        D. EPA Proposes Revised Greenhouse Gas Reporting Rule

On March 10, 2014, the EPA published a proposed revised greenhouse reporting ruling. It revises monitoring and data disclosure requirements for the petroleum and natural gas systems source category.[41] Among other things, the proposal would change the units of emissions for reporting, moving from carbon dioxide equivalent for all greenhouse gases to separate reports for methane, carbon dioxide and nitrous oxide. The proposal also adds reporting requirements for onshore production sources like engines, boilers, heaters, flares, separation and processing equipment and maintenance and repair equipment. The comment period will be open for thirty-days. 

        E. OSHA Holds Public Hearings for Proposed Rulemaking for Occupational Exposure to Respirable Crystalline Silica

On September 12, 2013, the Occupational Health and Safety Administration (“OSHA”) published a proposed rule to amend its existing standards for occupational exposure to respirable crystalline silica.[42] Public hearings on the proposed rule were held starting on March 18, 2014 and continue through April 4, 2014. The rule proposes updated permissible exposure limits for respirable crystalline silica (“silica”) based on a finding that employees currently exposed to silica face a significant risk to their health, including silicosis, at the current permissible exposure limits. OSHA has identified the fracking industry—which can utilize up to two million pounds of industrial sand per well site and was issued a Hazard Alert by OSHA in 2012 for workers’ exposure to high levels of silica—as one that will be impacted by the proposed rule. OSHA estimates that 25,000 workers across 200 fracking-related businesses will be impacted, and that annual compliance costs for the fracking industry will total approximately $28 million, resulting in 12 avoided fatalities and a decrease in other related illnesses.[43]

        F. White House Announces Initiative with EPA to Regulate Methane Emissions Related to Fracking

On March 28, 2014, the Obama administration announced its intent to work with the EPA on issuance of new regulations to control fugitive methane emissions at fracking operations.[44] The initiative is among actions that the Administration is sponsoring in connection with its goal of reducing GHG emissions 17% below 2005-levels by the year 2020. The Administration would seek to have the new regulations in place by the end of 2016.

II. STATE

        A. FracFocus

In April 2011, a consortium of state groundwater regulators collaborated with the Interstate Oil and Gas Conservation Commission and the Ground Water Protection Council on the creation of FracFocus.org, an on-line system by which operators can publically disclose constituents of fracking fluids. Several improvements were implemented beginning June 1, 2013, including expanded search functions allowing data to be accessed via chemical name, dates, 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 about fracking operations, there were still too many trade secret exemptions being claimed.[45] 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.” 

        B. Colorado

On February 23, 2014, the Colorado Air Quality Control Commission approved hydrocarbon emission control requirements with the intention of limiting emissions of volatile organic compounds, becoming the first state to directly regulate methane emissions from oil and gas operations. The regulations require operators to monitor and detect methane leakage through the implementation of monthly tests and new infrared technology, to repair such leaks within 15 days and to install technology that captures 95 percent of hydrocarbon emissions.

        C. Oklahoma

Beginning in January 2014, operators of all oil and gas wells in Oklahoma are required to report the chemicals used in fracking either directly to FracFocus.org or to the Oklahoma Corporation Commission, which will then add the information to the FracFocus database.

        D. California

On September 20, 2013, California Governor Jerry Brown signed into law stringent new requirements for fracking, including technical standards for well construction, fracking water management, groundwater monitoring and public disclosure of fracking-fluid constituents. (See OMM October 1, 2013, Client Alert, “California Adopts Strict New Law Regarding Fracking.”)

The new law required California’s Division of Oil, Gas and Geothermal Resources (the “Division”) to prepare regulations, which were proposed on November 15, 2013, thereby initiating a 60-day comment period (see SB 4 Proposed Well Regulations). The proposal sets extensive requirements for the integrity of wells and well casings; the geologic and hydrologic isolation of oil and gas formations during and following well stimulation (fracking) treatments; disclosure of the composition and disposition of well stimulation fluids (including fracking fluids, acid well stimulation fluids and flowback fluids); a permit program for well stimulation (including public disclosure and neighbor notification); and water-well testing. (See OMM January 8, 2014 Client Alert, “California Releases Hydraulic Fracturing Proposed Regulations.”) Notably, the California law requires that the composition of well stimulation fluids must be disclosed to the Division, whether or not the information is claimed as trade secret. The Division is then required to determine whether the information is a protected trade secret.

        E. Florida

The Florida Legislature is considering legislation that would require well operators to disclose the use within the state of certain chemicals related to fracking. House Bill 71, titled the “Fracturing Chemical Usage Disclosure Act,” would require the Department of Environmental Protection (“DEP”) to establish and maintain an online registry for all fracking wells. The registry would be required to include, at a minimum, the total volume of water used in the fracking treatment and each of the chemical ingredients for each well on which fracking treatments are performed. Service providers, vendors and owners or operators of wells on which a fracking treatment is performed would be required to report this information within 60 days of initiating fracking operations for each well. In connection with the DEP’s online registry, House Bill 157 would provide an exemption from public-records requirements for trade secrets relating to fracking treatments. The Florida bills are based on the model disclosure bills that the American Legislative Exchange Council sponsored, which have been the model for fracking disclosure bills in several other states, including in Texas where a similar bill was signed into law in 2011. The legislation is generally opposed by environmental groups, who claim that the legislation does not result in honest disclosure because it allows companies to withhold any chemicals from disclosure simply by claiming they are “trade secrets.”

        F. Illinois

On May 15, 2013, Illinois enacted the Hydraulic Fracturing Regulatory Act: a fairly robust law regulating hydraulic fracking, disclosure requirements and permitting requirements.[46] Among other things, it requires oil and gas drillers to disclose the chemicals that will be used before starting fracking operations, and making these chemicals subject to public comment and hearings. If a drilling operation is approved, the operator must submit fracking-chemical disclosures to the state, both before and after operations commence. Operators may avoid public disclosure by claiming certain chemicals as a trade secret, but such claims will require the approval of state regulators and may be challenged through Illinois’ freedom of information law.

Wastewater must also be stored in above-ground, closed tanks, and water around the fracking area must be sampled and tested in the same manner against a pre-drilling baseline 6 months, 18 months and 30 months after the fracking operations have been completed. If the water does not meet the baseline standard, operators will also be responsible to “restore or replace the affected supply with an alternative source of water adequate in quantity and quality for the purposes served by the water source,” unless they can prove that their operations did not cause the pollution. Very recently, concerns have been voiced about potential loopholes in the law whereby the regulations do not apply until 80,000 gallons of fluid have been injected into underground rock formations to extract oil and gas. Also, many fracking firms will use gas, foam, or gel instead of water or other fluids typically measured in gallons. Under the new regulations, drilling applications will require far more information, much of it technical. The agency will post that information on its website, set rules for public participation and enforce regulations on everything from how wells are constructed to waste management and water testing.

        G. Wyoming

On March 12, 2014, the Wyoming Supreme Court issued its much anticipated ruling in Powder River Basin Resource Council v. Wyoming Oil and Gas Conservation Commission. 2014-WY-37 (Wyo. 2014). The case involved whether trade-secrets exemptions in the state’s public records law may be used to shield the disclosure by operators of chemicals used during fracking. The Wyoming District Court found that the Oil and Gas Conservation Commission acted appropriately in denying a public records request for certain ingredients in various fracking additives, holding that they were entitled to protection from public disclosure due to their proprietary nature under Wyoming’s trade secret protection case law. Powder River Basin Res. Council v. Wyoming Oil & Gas Conservation Comm’n, No. S-13-0120 (Wyo. 2013).

The Wyoming Supreme Court reversed on a procedural ground, holding that appellant was “required to follow the procedures set forth in the [Wyoming Public Records Act]” not the Wyoming Administration Act. “The WPRA requires the district court to independently determine whether information must be disclosed or not, rather than to review a decision of the Supervisor as an administrative decision.” The Court declined to determine whether the individual chemical ingredients can be trade secrets, remanding the case instead to the Wyoming District Court to determine whether the ingredients used in fracking can justify application of the trade secret exemption. “[U]nwilling to cast the district court adrift without some guidance on the standard to be applied in trade secret cases under the WPRA,” the Court analyzed the various definitions of the term “trade secrets” advanced by the parties and adopted the definition articulated by federal courts under the Freedom of Information Act,[47] which is narrow and requires a “direct relationship between the trade secret and the productive process.”

Uncertainty remains as to whether the ruling will result in additional fracking protections, have any impact on the disclosure of trade secrets or disrupt fracking operations in Wyoming.

In groundwater news, the EPA announced last June that it would discontinue its plan to have independent scientists review the EPA’s finding that fracking may be linked to groundwater pollution in central Wyoming—an area that has been a focus of the debate over whether fracking can pollute groundwater ever since the EPA’s initial report came out in late 2011. The EPA is standing by its initial findings, but state officials, who have been skeptical about the notion that fracking is connected to groundwater pollution, will lead further investigation regarding the alleged link.

Relatedly, on November 12, 2013, Wyoming Oil and Gas Conservation Commission approved a baseline groundwater testing rule for oil and gas operators.[48] The rule requires oil and gas companies to test wells or springs within a half-mile of their drilling site before, during, and after drilling. The tests will measure a range of factors, including temperature, bacteria, dissolved gases like methane and propane, and roughly 20 chemical compounds and elements including barium, benzene, strontium and nitrates. The rule went into effect March 1, 2014.

        H. North Dakota

Facing increased pressure from lawsuits from mineral estate owners challenging the flaring of natural gas (as wasteful, not environmentally harmful), on March 5, 2014, the North Dakota Industrial Commission adopted a plan to reduce natural gas flaring.[49] The Plan requires companies filing permit applications after June 1, 2014 to provide gas capture plans. It also requires permit applicants to submit affidavits that they have provided their capture plans to all natural gas-gathering companies working in the area. The Department of Mineral Resources will also hold a hearing on field rules governing production curtailment.

CASE SPOTLIGHT

        A. Hughes v. Department of Environmental Quality: Michigan Court Rules That Fracking Injection Wells Are Not Subject to Certain Environmental Regulations

In a decision that will help inform national debate on the extent to which federal and state waste-disposal regulation applies to fracking operations, on February 11, 2014, in a 3–0 unpublished opinion, the Michigan Court of Appeals (“Court”) affirmed a trial-court determination that wells completed using fracking are not subject to environmental regulations applicable to injection wells under Michigan administrative rules.

Plaintiffs requested a declaratory ruling that the defined term “injection well” under Michigan Administrative Code Rule 324.102(x) includes wells completed using fracking (“frack wells”), a determination that would subject such frack wells to more stringent environmental regulations applicable to waste injection wells. In response, the Michigan Department of Environmental Quality (“DEQ”) determined that frack wells are not waste injection wells under Rule 324.102(x) because the rule is limited to those wells that are used for disposal, storage or secondary recovery of oil and gas, whereas frack wells inject fluids for the initial stimulation and recovery of oil or gas.

On administrative appeal, the trial court granted summary judgment to the DEQ, and the Court of Appeals affirmed. The Court found that because frack wells are not used to dispose of waste fluids or for the storage of hydrocarbons, a frack well is not a waste injection well under the plain language of the rule. See Hughes v. Michigan Department of Environmental Quality, Mich Ct. App., No. 31290.

The ruling from this decision may guide court decisions in similar litigation that arises in other states under comparable regulations. It is noteworthy that the EPA defines an “injection well” as “a ‘well’ into which ‘fluids’ are being injected,”[50] which is broader than the definition under Michigan Rule 324.102(x) and has no mention of a purpose, thereby creating an issue as to whether fracking wells would fall under the EPA UIC program’s jurisdiction. 

        B. FERC Decision Challenged in Federal Court

In February 2014, the D.C. Circuit heard oral argument regarding whether the Federal Energy Regulatory Commission (“FERC”) erred in not allowing the public to comment on environmental studies submitted by the natural-gas industry to support 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). Environmentalist 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.

 

[1] See Food & Water Watch, Local Actions Against Fracking: Passed Actions (2014), available here.
[2] Brian Amaral, Another Middlesex County Town Bans Fracking, N.J.com (Oct. 3, 2013), available here.
[3] Chip Northrup, NJ County Bans Fracking, No Fracking Way, (Dec. 22, 2013), available here.
[4] James M. O’Neill, Is Fracking In New Jersey’s Future?, NorthJersey.com (Aug 1 2013), available here.
[5] Norse Energy Corp. USA v. Town of Dryden, APL-2013-00245 (N.Y. 2013).
[6] Anschutz Exploration Corp. v. Town of Dryden, No. 2011-0902, 2012 WL 556172 (N.Y. Sup. Ct., Feb. 21, 2012). Anschutz Exploration Corporation assigned its interests in certain oil and gas leases to Norse Energy Corporation during the appeals process. The court substituted Norse Energy as plaintiff in the proceeding.
[7] Norse Energy Corp. USA v Town of Dryden, 108 A.D.3d 25, 31 (N.Y. App. Div. 3d Dep’t 2013) (citing N.Y. Envtl. Conserv. Law 23-0303(2)).
[8] Id. at 32.
[9] Pa. Oil & Gas Act of Feb. 14, 2012, No. 13 (“Act 13”), 58 Pa. Cons. Stat. §§ 2301-3504 (2012).
[10] Robinson Twp. v. Commonwealth, 52 A.3d 463 (Pa. Commw. Ct. 2012).
[11] Robinson Twp. v. Commonwealth, 2014 Pa. LEXIS 513 (Pa. Feb. 21, 2014).
[12] Pamela King, E&E Publishing Advocacy: Ohio Community Group Hopes Third Time’s the Charm for Anti-Fracking Measure (Mar. 10, 2014), available here.
[13] 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.
[14] State of Ohio ex rel. Morrison v. Beck Energy Corp., 989 N.E. 2d 85 (Ohio Ct. App. Feb. 6, 2013).
[15] Section 3, Article XVIII of the Ohio Constitution. Ohio ex. rel. City of Munroe Falls v,
[16] Brief for Appellant, State of Ohio ex rel. Morrison v. Beck Energy Corp., No. 2013-0465 (Ohio filed Sep. 6, 2013), available here.
[17] See, e.g., Brief of Municipal Amici Curiae et. al, State of Ohio ex rel. Morrison v. Beck Energy Corp., No. 2013-0465 (Ohio filed Sep. 6, 2013), available here.
[18] Brief for Amicus Curiae Artex Oil Company et. al, State of Ohio ex rel. Morrison v. Beck Energy Corp., No. 2013-0465 (Ohio filed Oct. 28, 2013), available here.
[19] Council of the District of Columbia, Sense of the Council in Support of a Prohibition on Fracking in the George Washington National Forest Resolution of 2014 (March 5 2014), available here.
[20] Additional shales at play in this region include Bakken and the Woodford Shale. There are no reported local or state efforts to ban fracking in these areas. In fact, North Dakota actively lobbies against any federal fracking regulation that could impact operations in North Dakota.
[21] Illinois Hydraulic Fracking Regulatory Act, Public Act 098-0022, (forthcoming at Ill. Admin. Code tit. 62 § 245).
[22] Village of Alto Pass, IL, Ordinance 2012-1211, An Ordinance to Protect the Public Health, Safety, and Rights of the Community, its Air, Water, and Land, and the Natural Environment, from Unconventional Extraction of Shale Gas and Oil and Associated Activities (Dec. 13, 2012).
[23] See supra note 1 (Michigan).
[24] Dawson Bell, Fracking Protesters Make Noise at State Auction for Drilling Land, Detroit Free Press (May 8, 2012), available here.
[25] Committee to Ban Fracking in Michigan: Status of Ballot Initiative, available here.
[26] The Boulder initiative extended a one-year moratorium on all oil and gas exploration for an additional four years, while the Fort Collins and Broomfield measures, respectively, prohibit 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.
[27] Colo. Oil & Gas Ass’n v. City of Lafayette, No. 2013-cv-031746 (Colo. Dist. Ct., Boulder Cty, compliant filed Dec. 3, 2013), available here
[28] Colo. Oil & Gas Ass’n v. City of Fort Collins, No. 2013-cv-031385 (Colo. Dist. Ct., Larimer County, complaint filed Dec. 3, 2013), available here.
[29] Colo. Oil & Gas Conservation Comm’n v. City of Longmont, No. 2012-cv-702 (Colo. Dist. Ct., Boulder Cty).
[30] Los Angeles County Council, Motion (to Adopt Ordinance Placing Moratorium on Hydraulic Fracking) (Feb. 28, 2014), available here.
[31] Christine Mai-Duc, Carson Imposes Moratorium on Oil Drilling Over Fear of Fracking, LA Times (Mar. 19, 2014), available here.
[32] Mora County, Ordinance 2013-01: Mora County Community Water Rights and Local Self-Government Ordinance, (Apr. 29, 2013), available here.
[33] SWEPI LP v. Mora County, No. 14-cv-00035 (D. N.M. filed Jan. 10, 2014).
[34] RT.com: City of Dallas Effectively Bans Fracking (Dec. 13, 2013), available here.
[35] See also Samantha Blons, Battle Over Fracking in Dallas Continues With Takings Lawsuit, Energy Center: Univ. Tex. Austin Law, available here.
[36] Jim Malewitz, Denton Group Seeking Fracking Ban Cites Gains, Texas Tribune (Mar. 14, 2014), available here.
[37] Associated Press, Natural Gas: Arkansas Commission Votes to Shut Down Wells, Huffington Post (Jul. 27, 2011), available here.
[38] The definition is based on five Chemical Abstracts Service registry numbers, which are CAS 68334-30-5, CAS 68476-34-6, CAS 68476-30-2, CAS 68476-31-3 and CAS 8008-20-6. This is consistent with the 2012 draft guidance, except that the draft included Aruba gas oil.
[39] Arizona, Washington, D.C., Florida, Hawaii, Iowa, Kentucky, Pennsylvania, Michigan, Minnesota, New York, Tennessee, Virginia, American Samoa, the Virgin Islands and most Indian tribal areas. Note that the EPA has permitting authority for Class II wells in Florida; however, a well operator must also obtain a permit from the Florida Department of Environmental Protection for a Class II well.
[40] Significant New Use Rules on Certain Chemical Substances: Final Rule, 78 Fed. Reg. 27048 (May 9, 2013).
[41] Greenhouse Gas Reporting Rule: Revisions and Confidentiality Determinations for Petroleum and Natural Gas Systems: Proposed Rule, 79 Fed. Reg. 13394 (Mar. 10, 2014).
[42] Occupational Exposure to Respirable Crystalline Silica: Proposed Rule, 78 Fed. Reg. 56274 (Sep. 12, 2103).
[43] OSHA estimates that the proposed rule will result in 2.9 avoided lung cancers (mid-point estimate), 6.3 prevented non-cancer respiratory illnesses, and 2.3 prevented cases of renal failure—and 40.8 avoided cases of silicosis morbidity.
[44] Office of the White House, Climate Action Plan: Strategy to Reduce Methane Emissions (Mar. 2014), available here.
[45] U.S. Dep’t of Energy, Sec’y Energy Advisory Bd., Task Force Report on FracFocus 2.0 (Feb. 24, 2014), available here.
[46] Illinois Hydraulic Fracking Regulatory Act, Public Act 098-0022, (forthcoming at Ill. Admin. Code tit. 62 § 245), available here.
[47] Under FOIA, a trade secret is define as “a secret, commercially valuable plan, formula, process, or device that is used for the making, preparing, compounding, or processing of trade commodities and that can be said to be the end product of either innovation or substantial effort.” 
[48] Available here
[49] Mark Wolski, North Dakota Industrial Commission Adopts Plan to Reduce Natural Gas Flaring, Bloomberg BNA: Daily Environmental Report, March 5, 2014.
[50] 40 C.F.R. § 144.3. Under the same regulations, “fluid” is defined as “any material or substance which flows or moves whether in a semisolid, liquid, sludge, gas, or any other form or state,” and “well” is defined as “a bored, drilled, or driven shaft whose depth is greater than the largest surface dimension; or, a dug hole whose depth is greater than the largest surface dimension; or, an improved sinkhole; or, a subsurface fluid distribution system.”


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