House subcommittee meeting on "Protecting States' Rights to Promote American Energy Security Act"

On July 25, 2013, the U.S. House of Representatives’ Subcommittee on Energy and Mineral Resources held a hearing on the proposed "Protecting States' Rights to Promote American Energy Security Act" (H.R. 2728), one week after the act was introduced by Representative Bill Flores (R-Texas).

This proposed act would require the Department of the Interior to defer to state regulations, permitting, and guidance relating to hydraulic fracturing on federal lands within the state’s boundaries.

Testimony from representatives of the Alaska Oil and Gas Conservation Commission, the Texas Railroad Commission, and Utah’s Division of Oil, Gas and Mining expressed their support for the legislation, with each indicating that his/her state has done extremely well in regulating oil and gas exploration, development, and production and protecting the environment from operations such as hydraulic fracturing. 

Christi Craddick, the Commissioner for the Texas Railroad Commission, stated that “Texas has successfully regulated oil and gas production for almost 100 years and knows better than the federal government how to both serve and protect the unique interest of our state.” 

As for protecting ground water from hydraulic fracturing contamination, Ms. Craddick and Ms. Cathy P. Foerster from Alaska testified that neither state had documented instances of subsurface damage to underground sources of drinking water. 

The state representatives saw no need for “duplicative regulation of an already stringently regulated process” and that the “one size fits all” federal regulation mentality does not take into consideration each state’s unique geology, hydrology, and production issues. 

Speaking against the proposed act was Ms. Lois N. Epstein, with The Wilderness Society in Anchorage, Alaska, who stated that “it is essential that the federal government ensure adequate regulations [i.e., a baseline for hydraulic fracturing] are in place for industrial activities occurring on lands that it manages while providing states with the ability to exceed those requirements or to address atypical conditions.” Ms. Epstein saw the act as unconstitutional under the Supremacy Clause whereby state law is preempted to the extent it conflicts with federal law.

In addition to expressing her support for the act, Ms. Foerster addressed what she considered were “several misperceptions” expressed by Secretary of the Interior Sally Jewell in a hearing held on July 17, 2013. 

According to Ms. Forester. Secretary Jewell gave the “perception no national standard exists for hydraulic fracturing, that some states regulate properly but others use 30-year old technology, and that states that are just starting to deal with hydraulic fracturing have no place to go for help in establishing appropriate regulations.” 

Ms. Foerster pointed to the Interstate Oil and Gas Compact Commission (IOGCC) and STRONGER (State Review of Oil and Natural Gas Environment Regulations) as two groups who provide base sets of guidelines on a variety of oil and gas operations, including hydraulic fracturing, that assist states in setting standards for environmental protection consistent with the varying engineering and geologic needs of each state. 

These groups meet several times each year to ensure that their guidelines are up-to-date.

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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US House subcommittees hear testimony on EPA hydraulic fracturing studies

On July 24, 2013, the Energy and Environment Subcommittees of the U.S. House of Representatives’ Committee on Science, Space and Technology held a joint hearing on “Lessons Learned: EPA’s Investigations of Hydraulic Fracturing.”

The hearing centered on questions about the EPA’s scientific processes for its study on the potential impacts of hydraulic fracturing on drinking water resources (final report due in 2014) and on questions raised about prior EPA studies of alleged water contamination in three locations (Pavillion WY, Parker County TX, and Dimock PA) in which the EPA, after receiving additional data, retreated from its original conclusions connecting hydraulic fracturing with contaminated groundwater.

In response to GOP subcommittee members’ expressed concerns about whether the EPA can complete an unbiased study, EPA representatives assured the members of Congress that the it is performing “a rigorous study” using “all proper procedures” to determine whether drinking water resources are being contaminated.

According to the EPA, strict quality assurance requirements are being followed and scientific integrity is being maintained during the peer review process.

Below is a brief summary of some of the witness testimony and comments from members of Congress.

Chris Stewart (R-Utah): “EPA’s recent announcement that it is walking away from its attempt to link hydraulic fracturing to groundwater issues in Pavillion, Wyoming is the most recent example of the agency employing a ‘shoot first, ask questions later’ policy toward unconventional oil and gas production… [W]e need to be vigilant in insuring that the Agency does not put the regulatory cart before the scientific horse.”

Cynthia Lummis (R-Wyo.): The report on contaminated groundwater in Pavillion, Wyoming “was so riddled with mistakes in well construction, errors in sampling techniques, and failures to follow protocol that even the USGS…could not replicate the results.” As for the current study being done, “[t]he study design is flawed and indicative of the Agency’s characteristic outcome-drive approach to hydraulic fracturing, where achieving desired conclusions takes precedent over basing those conclusions on the best available science.”

Lamar Smith (R-Texas): “[T]he EPA has failed to include a risk assessment as part of this study… The Agency should base its work on sound science rather than regulatory ambition.”

Suzanne Bonamici (D-Oregon) expressed her concern that the oil and gas “industry has a history of adopting environmental measures only after the drop of a [state or federal] regulatory gavel.”

Fred S. Hauchman, Ph.D., Director, Office of Science Policy, Office of Research and Development, U.S. EPA, assured the subcommittee that the study was being made in accordance with the Agency’s Scientific Integrity Policy and the six principles set out by Congress in requesting the study. These principles are: (1) use the best available science, (2) incorporate independent sources of information, (3) follow rigorous quality assurance procedures, (4) engage stakeholders at every level, (5) conduct the study transparently, and (6) commit to a thorough peer review. “This is not a quantitative risk analysis… We are completing a thorough analysis of available” information which is “highly desirable and useful.” He indicated that, while the study will provide context for potential risks, it will not set out a specific number or percentage nor will it include recommendations which are not within the scope of the study.

John C. Rogers, Associate Director of The Division of Oil, Gas and Mining (DOGM) for the State of Utah, stated that “[i]n all of the historical records of DOGM, there has never been a verified case of hydraulic fracturing causing or contributing to contamination of water resources.”

Brian Rahm, Ph.D., New York State Water Resources Institute, Cornell University, indicated that there are several lessons to be learned from the EPA’s Pavillion, Wyoming study: (1) the design and scope of gas development research needs to be carefully thought out, adhered to, and clearly communicated; (2) regional differences, such as geology and best practices, matter; (3) critical issues for consideration include well integrity (casing and cementing), management of waste materials, and disclosure of chemicals; and (4) oversight is required for construction of gas and water wells in formations that contain aquifers. Dr. Rahm also testified that these EPA studies cannot provide a general risk assessment of groundwater contamination because each study addresses specific complaints under specific geological and regulatory conditions. To make a general assessment requires data on a regional or national scale, not just from locations where complaints have been lodged or groundwater contamination has occurred. “You need to know when things go right” as well as what goes wrong to make a valid assessment. Because local characteristics vary, Dr. Rahm is in favor of regulation by the states.

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Fracking disclosure rules proposed in Kansas

The director of the Kansas Corporation Commission’s Oil and Gas Conservation Division (KCCOGC) has proposed rules that would require oil and natural gas companies to disclose non-trade secret chemicals that they use in hydraulic fracturing activities. Pointing out that the physical act of hydraulic fracturing has been regulated for years under Kansas’ wellbore construction and waste handling and disposal rules, the director stated that chemical disclosure was needed due to the significant number of wells using the fracking procedure near larger population areas. Under the rules, the disclosures would be made directly to the KCCOGC or through the “chemical disclosure registry” (FracFocus.org) with a verification to the KCCOGC.

The operator would be required to provide a list of each fracking treatment as part of the required completion report. The list would include, as “a percentage by mass of the total amount of hydraulic fracturing fluid,” (1) the base fluid used, (2) each proppant, and (3) “each chemical constituent at its maximum concentration in the hydraulic fracturing fluid and its CAS number.” Disclosures would not be required for a chemical constituent that is a trade secret, an incidental result of a chemical reaction or process, or a “component of a naturally occurring material and becomes part of the hydraulic fracturing fluid during the hydraulic fracturing treatment.” For trade secrets, the operator must provide the name of the chemical family and the name, address, and telephone number of the party claiming the trade secret. Trade secrets may need to be disclosed to the KCCOGC in its investigation of any spills or contaminants entering fresh or usable water and to any health professional who determines that the “information is reasonably necessary for emergency treatment,” provided he/she signs a statement of need and agrees to confidentiality, verbally and in writing.

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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Proposed legislation would allow a state to control hydraulic fracturing on public lands within its borders

On July 18, 2013, U.S. Representative Bill Flores (R-Texas) proposed legislation (H.B. 2728 – Protecting States’ Rights to Promote American Energy Security Act) that would allow a state to control hydraulic fracturing on public lands within its borders if the state has hydraulic fracturing rules already in place. This legislation would bar the federal government from applying the Bureau of Land Management’s proposed regulations (see prior blog dated May 16, 2013, “BLM Releases revised proposed rules on hydraulic fracturing”) regardless of whether the state’s rules are duplicative, more or less restrictive, have different requirements or do not meet federal guidelines. Representative Flores stated that, with the states’ “long and successful track record of regulation oil and gas operations,” the bill halts “overreaching federal involvement in hydraulic fracturing operations” and “recognizes constitutionally protected states’ rights by continuing to let states effectively regulate themselves through a proven system that is working.” A hearing on this legislation will be held on July 25, 2013, before the U.S. House of Representatives’ Energy and Mineral Resources Subcommittee.

This proposed legislation came one day after Interior Secretary Sally Jewell testified before the House Natural Resources Committee on the operations, management and rulemakings of the Department. At the hearing, Secretary Jewell defended the proposed hydraulic fracturing regulations, stating that a “universal baseline” was needed to ensure the safe and responsible development of natural gas resources on federal lands because the current federal rules are outdated and states vary in their understanding of hydraulic fracturing, with many states having no rules relating to the process.
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Shale Gas Producers Offered Tax Breaks in UK

On July 19, 2013, the British Government, having lifted its 18-month  ban on hydraulic fracturing late last year, proposed cutting its shale gas production income taxes from 62 percent to 30 percent in an effort to encourage shale gas development which would create more jobs and keep energy costs low for millions of people.

In June, a report from the British Geological Survey indicated that there was more than twice as much shale gas in the north of England than there was thought previously to be in the entire country (more than 1,300 trillion cubic feet of shale gas in Lancashire and Yorkshire). 

A recovery rate of 10 percent (similar to US fields) would give the UK enough gas to meet demand for the next 47 years.

Chancellor of the Exchequer George Osborne explained that the slash in taxes “recognizes the high upfront costs associated with shale gas projects and ensures that the greatest support is offered to the industry in its early stages when costs per pad are likely to be highest.”

To ensure confidence in the hydraulic fracturing process, planning practice guidelines have been issued and operators have promised local communities a 1 percent share of output revenue plus at least 100,000 pounds ($152,000) for each fracked well.

According to Osborne, the government wants “to create the right conditions for industry to explore and unlock that potential in a way that allows communities to share in the benefits.”

After a short consultation period, the proposed legislation will be put before Parliament.
This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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Preliminary Report Shows No Contamination of Groundwater from Hydraulic Fracturing

On July 19, 2013, the Department of Energy’s National Energy Technology Laboratory (NETL) issued a statement that it has found “nothing of concern” in its study of alleged groundwater contamination from hydraulic fracturing at a site on the Marcellus Shale formation in Pennsylvania.

The NETL cautioned that the results are still preliminary, with data still being collected, analyzed and validated.  The study is based on the results of the NETL’s  use of “tracer chemicals” (fracking fluids equipped with detectable markers) to determine whether any chemicals from the fracking procedure migrated into the water resource.

A final report is expected by year’s end. This report comes within weeks of the U.S. Environmental Protection Agency’s decision to forego further evaluation of groundwater contamination in Pavillion, Wyoming, turning over that analysis to Wyoming officials. See previous blog posting dated July 12, 2013, EPA withdraws from continued study of water in Pavilion, Wyoming.

The EPA is continuing its broad study of the “Potential Impacts of Hydraulic Fracturing on Drinking Water Resources” with a final report due at the end of 2014.

The American Natural Gas Association (ANGA) said that it was pleased with the NETL’s  preliminary results which show that the natural gas industry is committed to developing the nation’s resources safely and responsibly.

The Sierra Club discounted the preliminary report by stating that “merely looking at one well or a handful of wells” provides “a very myopic view” of the potential impacts of hydraulic fracturing.

This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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EPA withdraws from continued study of water in Pavillion, Wyoming

On June 20, 2013, the EPA announced that, while standing behind its research that found elevated levels of glycols, alcohols and methane in water samples from deep monitoring wells in Pavillion, Wyoming, it was handing over its investigation into the alleged groundwater contamination to Wyoming state officials, including the Wyoming Department of Environmental Quality (DEQ). The EPA stated that it would not seek peer review or finalize its draft report and would not use the report’s conclusions in any rulemaking because it could not directly connect the chemicals found to hydraulic fracturing activities, indicating that exploration of migration pathways proved inconclusive. The Wyoming DEQ will continue to evaluate the water quality in 14 domestic wells in Pavillion and plans to publish its results by the end of 2014.

The EPA’s withdrawal comes after it spent approximately three years sampling and testing water in the area. In 2010, after well owners in Pavillion complained of objectionable taste and odor in their water, the EPA tested water samples and found that 11 out of 39 wells were polluted with 2-butoxyethanol phosphate which is contained in some drilling fluids. The EPA published a draft report of their findings in December 2011. This report was greatly criticized as being based on limited and questionable data, dismissing reports of historical problems with groundwater quality, and examining fracking as the only contamination source. The EPA eventually delayed peer review of the draft report to allow for additional sampling. In 2012, in cooperation with the EPA, the U.S. Geological Survey (USGS) re-sampled the EPA’s two monitoring wells as well as four private and one public water supply wells. The USGS found that groundwater near the monitoring wells contained synthetic chemicals and high levels of methane. Once again these results were criticized, first by the Wyoming DEQ who complained that the results had not been vetted by state agencies and that the research was conducted without transparency and also by Encana, an operating company with gas wells in the area, who argued that the EPA provided no evidence that fracking or any drilling activity was the direct cause of the water contamination. Shortly after extending the public comment period for the draft report and the USGS’ results until September 30, 2013, the EPA announced its withdrawal from the investigation.

Wyoming Governor Matt Mead is pleased with the state taking over the investigation and with Encana’s contribution of $1.5 million to defray the costs of investigation and to provide interim funding for a nonprofit to provide water to several Pavillion residents. The Pavillion Area Concerned Citizens (PACC), the Powder River Basin Resource Council, and Earthworks (all environmental groups) are critical of the change, believing that state officials will not hold the energy companies accountable.

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Lone Pine order overturned by intermediate Appellate Court in Colorado fracking lawsuit

On July 3, 2013, the Colorado Court of Appeals (Case No. 2013 COA 106) overturned a Lone Pine order and a dismissal order issued by the lower court in the case of Strudley v. Antero Resources Corporation, Antero Resources Piceance Corporation, Calfrac Well Services, and Frontier Drilling LLC (Case No. 2011-cv-2218, Denver County District Court), remanding the case back to the trial court for further proceedings.

The Strudley family filed their lawsuit in March 2011, complaining that defendants’ natural gas well activities, including hydraulic fracturing, had contaminated their water supply. The Lone Pine order issued by the court required the plaintiffs to make a prima facie showing of exposure, injury, and specific causation by providing expert affidavits from doctors, contamination reports and other information relating to the identification and quantification of hazardous substances to which each family member was exposed from defendants’ operations, as well as how long and at what concentration levels. The plaintiffs submitted the affidavit of a doctor who, although never examining the family members, concluded that “sufficient environmental exposure and health information exists to merit further substantive discovery.” The lower court found this affidavit to be insufficient and ordered the case dismissed, leading to the appellate review of the two orders.

The Colorado Court of Appeals reversed. The court cited two primary reason for doing so. The first was anchored in two Colorado Supreme Court cases that the court interpreted as standing for the proposition “that a trial court may not require a showing of a prima [facie] case before allowing discovery on matters central to a plaintiff’s claims”. Second, the court cited differences between Colorado Rule of Procedure 16 and Federal Rule of Civil Procedure 16. (Federal courts often cite to Fed. R. Civ. P. 16 as the basis of their authority to issue Lone Pine orders.) The court further held that, even assuming it was writing on a blank slate, unlike the majority of cases allowing Lone Pine orders, this was not a mass tort case nor was it “any more complex or cost intensive than an average toxic tort case.” The court saw this lawsuit as simply a case involving four family members suing four defendants over alleged pollution of one parcel of land, making the Lone Pine order unnecessary. The court did note that at least one other court issued a Lone Pine order in a case involving only a few parties. See Pinares v. United Techs. Corp., No. 10-80883, 2011 WL 240512, at *1-2 (S.D. Fla. Jan. 19, 2011).

It is unknown whether the defendants will seek further review from the Colorado Supreme Court. However, even if the decision stands, other jurisdictions may not find it persuasive because of differences between their own precedent and procedural rules. The court might well have reached a different result if the case involved multiple parties and was more complex. Indeed, the court left open the door that in “extraordinary circumstances,” a Lone Pine order may be appropriate by stating that the prior Colorado Supreme Court decisions “prohibited the trial court from entering the Lone Pine order here.” (emphasis added); see also id. (“The circumstances surrounding the case were not shown to be so extraordinary as to require departure from existing rules of civil procedure.”).

This article was prepared by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
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Pennsylvania General Assembly passes bill regulating distribution of oil and gas royalty information to lessors

The Pennsylvania General Assembly has passed a bill (SB259) regulating how oil and gas royalty information is to be provided to lessors. As noted in an earlier blog posting the Pennsylvania House passed a bill earlier this year addressing this topic. The final version of the bill, which has been sent to the Governor, has some differences from the version previously passed by the House.

In addition to a few other changes, SB 259 no longer has a provision allowing for escrowing of payments. And, notably, while the required content of the royalty statement remains basically unchanged, the bill now states that the deductions that are to be shown are those deductions allowed by the “lease” as opposed to those allowed by “the division order, lease, servitude or other agreement” as in HB 1414.

Additionally, the prior House Bill included language regarding retroactivity of certain provisions and a direction that the addition of a certain section was intended to be a continuation of former section in the statute. That language does not appear in the Senate version. Nor is there an express repeal of a current section of the law, which was included in the prior House Bill.

This article was prepared by Jeremy Mercer (jeremy.mercer@nortonrosefulbright.com or 724 416 0440) from Norton Rose Fulbright's Energy Practice.
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