This Week in Hydraulic Fracturing

Volume 2, No. 30


XTO settles alleged Clean Water Act violations. XTO, Exxon Mobil’s shale development subsidiary, settled the Environmental Protection Agency (“EPA”) claims of Clean Water Act violations related to discharges of wastewater into a tributary of the Susquehanna River in Pennsylvania. Under the consent decree, XTO will pay a $100,000 civil penalty and spend approximately $20 million on wastewater management improvements at its operations in Pennsylvania and West Virginia such as increased wastewater recycling, storage tank alarms, secondary containment, and other new equipment and operating practices.

Study: BLM underestimated costs of proposed rulemaking. A study prepared by John Dunham & Associates for the Western Energy Alliance estimates that the U.S. Bureau of Land Management’s (“BLM”) revised proposed regulations governing the use of hydraulic fracturing to develop federal oil and gas resources would impose $346 million per year in additional costs on about 3,400 wells. This is more than 15 times higher than BLM’s own estimate of the proposed rule’s cost, although less than the cost of BLM’s May 2012 original proposal. Even as revised, industry members have continued to express concerns about the proposal, including that BLM lacks the budget and staff to implement the proposed requirements, and has urged that regulation of onshore oil and gas development should remain state matters. The proposed rule states that BLM would defer to states that have regulations at least as stringent as these proposed federal rules, but includes no mechanism for making that determination. Bills have been introduced in the House of Representatives that would block the proposed rule from becoming law and shift regulatory responsibility to the state where the federal land or subsurface rights are located.

House hearing focuses on EPA hydraulic fracturing study. EPA’s hydraulic fracturing study was the focus of a Capital Hill hearing. Several members of the House Science, Space, and Technology Committee urged that EPA’s study focus on probable impacts, not “possible impacts,” fearing that the agency will rely on largely hypothetical scenarios to justify federal regulation. The EPA study was ordered by Congress in 2010 and will be the product of 18 separate agency research projects, including examinations on injection fluid chemicals, well construction standards, and impacts on water quality. EPA’s witness, Fred Hauchman, the director of the Office of Science Policy, stated that the study will not include a quantitative risk assessment but would still be valuable given the lack of research on potential impacts on sources of drinking water. He assured that industry, state regulators, and NGOs would all be able to provide input on the peer-reviewed study and he was confident that the study would produce “a useful report.”

EPA: injection wells should stop operating if they induce seismic activity. According to an EPA draft report, the agency could force waste disposal injection wells to shut down if they are found to cause seismic activity. The draft includes a “decision model” that also outlines a handful of less drastic options that operators could implement, such as reducing the injection volume. Some have attributed small seimic activity to injection wells located in Ohio, Oklahoma, and Arkansas, three states which are now doing substantial business in disposing of hydraulic fracturing wastewater. Although regulation of these wells is typically delegated to states, and the draft was characterized as guidance for state agencies, EPA’s draft report states that it still has the authority to step in and shut down the wells if they are believed to be responsible for inducing seismic events. State agencies in Arkansas, Ohio, and Texas have already shut down wells on these grounds. Development of the draft, however, stalled. Originally intended for peer-review before being released, EPA appears to have abandoned the project without explanation.

GAO to examine impact of shale development on transportation infrastructure. Senator Jay Rockefeller (D-WV), Chair of the Senate Commerce Committee, requested the Government Accountability Office (“GAO”) to review the potential impacts of shale development on the country’s transportation infrastructure. Citing recent railroad accidents involving tanker cars of crude oil, Sen. Rockefeller asked GAO to examine safety concerns along key transportation routes as well as the impacts of shale gas development in rural areas of West Virginia. High volumes of heavy truck traffic carrying equipment and supplies in connection with shale development have been a source of concern in some areas. The report is to provide recommendations regarding federal rail, pipeline, and highway transportation policies.

U.S. Dep’t of Justice investigating well service companies. Attorneys from the U.S. Department of Justice’s antitrust division issued a civil investigative demand to well service companies Halliburton and Baker Hughes. Representatives from the Department of Justice and the companies declined to provide details other than to say that the government requested two years’ worth of documents and information regarding allegedly anticompetitive practices related to oil and gas wellfield services.


North Carolina shale development bill fails. Backers of hydraulic fracturing in the North Carolina legislature failed to push through a bill allowing the practice within the state. This was the third failed attempt in 2013; however, Governor Pat McCrory and Senate leaders expressed optimism that the bill will either be raised again in a special session or in next year’s short session, beginning in May 2014. The bill would have lifted the existing moratorium, allowing the state to start issuing permits for hydraulic fracturing by mid-2015. The bill was supported by the North Carolina Department of Environment and Natural Resources, which would issue those permits. The regulatory package also would have established a severance tax on oil and gas production and several other provisions, such as the protection of proprietary information used in hydraulic fracturing fluids. By a narrow margin, however, the House rejected the package, with opponents asserting environmental concerns and claiming it was too late in the session to consider the bill.

Kansas proposes chemical disclosure rules. The Kansas Corporation Commission’s Oil and Gas Conservation Division proposed new rules that would require oil and natural gas companies to disclose the identity of non-proprietary chemicals used in hydraulic fracturing fluids. The Kansas Corporation Commission has permitted hydraulic fracturing since 1947 but does not have specific regulations governing the practice. The Commission will hold a hearing on the proposed rules on August 10, 2013.

Loveland, Colorado gets hydraulic fracturing moratorium on ballot. An environmental group succeeded in gathering enough signatures to put the question of whether the town of Loveland, Colorado should temporarily block hydraulic fracturing on a ballot. Petitions for the referendum, proposing a two-year moratorium, garnered 3,700 signatures. The initative was coordinated by a local environmental group called Protect Our Loveland.

North Dakota studying radioactive materials in drilling wastes. The North Dakota Department of Health is reviewing data on radioactive materials in wastewater from hydraulically fractured oil wells in the state’s Bakken Shale play. Naturally occurring radioactive materials can flow back up with wastewater. The state currently prohibits the disposal of materials registering at more than 5 picocuries. This requires drillers to ship wastes out of state, sometimes as far away as Texas. Depending on the results of the study, which may be completed by the end of the year, North Dakota may permit in-state disposal with additional regulatory safeguards.


British tax changes for shale gas takes shape. The U.K. previously announced that it would be reducing its taxes on natural gas exploration in order to encourage shale development. The substance of the tax changes began to take shape after the U.K. Treasury issued a consultation report. On-shore gas producers are currently subject to at least two taxes: the Ring Fence Corporation Tax and a Supplementary Charge, adding 32% to the company’s adjusted ring-fence profits. Wells that received development consent before March 1993 are subject to an additional Petroleum Revenue Tax. Together, they currently impose a 62% marginal tax rate on new wells and an 81% rate on the profits from older wells. The U.K. Treasury recommended that these rates be reduced through a “pad allowance” that exempts a portion of production from the Supplementary Charge based on the capital expenditures incurred for each well pad, with the first year allowing a 100% capital cost exemption. The recommendation also included other various offsets and allowance carryovers. According to the recommendation, this would off-set the high costs of developing the U.K.’s geologically challenging shale formation.

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