Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 13

Federal

Congress Pursues Bills to Block BLM Rule While Industry and States File Suit. Arguing that recent Bureau of Land Management (BLM) rules for hydraulic fracturing on federal lands would stifle economic development, Senator James Inhofe (R-OK) and 26 co-sponsors introduced a bill to block the new rule. House Majority Leader Kevin McCarthy (R-CA) stated that similar legislation is being formulated in the House. In 2013, the House passed a bill that would prohibit federal rules where hydraulic fracturing was already regulated under state law. Two industry groups and the state of Wyoming have already filed suit to vacate and remand the BLM rulemaking. Filed in Wyoming federal district court, the complaints argue that BLM lacks the statutory authority to enact the rules, and that the rules violate the Safe Drinking Water Act and are otherwise arbitrary and capricious. According to congressional testimony by BLM Director Neil Kornze, Wyoming’s lawsuit has prompted negotiations with the state regarding whether BLM would grant a variance from the federal rules for drilling within the state. Other states, industry associations, Indian tribes and environmental groups may also file suit challenging the rule.

BLM Works to Issue Variances. BLM Director Kornze told the House Natural Resources subcommittee that BLM hopes to have identified states that will receive variances from Bureau regulations governing hydraulic fracturing on federal lands by late June 2015, when those regulations go into effect. Under the new rule, BLM will waive federal regulations when state rules are equivalent or more protective of public health and the environment. He hopes that quick determinations will provide certainty for the oil and gas industry, which has voiced skepticism over the variance process. Oil and gas trade associations that have sued to block the rule have expressed concern that the variance process could be used to pressure states into conforming their own regulations to the BLM rule.

PHMSA Presses Criminal Enforcement for Gas Pipelines. The Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) announced that it would begin a criminal enforcement initiative for violations related to gas pipeline construction. PHMSA’s regulations govern pipeline safety during pre-construction and construction activities. PHMSA stated that it would begin working with EPA and the U.S. Department of Justice to identify the “highest-risk operators” and file criminal cases against “willful violations” of PHMSA standards.

Department of Energy: Relationship Between Bakken Oil and Rail Explosions not Established. A report by the U.S. Department of Energy (DOE) found that a relationship between light, sweet Bakken crude oil and combustion after a rail car derailment has “not been established.” Although the U.S. Department of Transportation continues to work on crude oil rail safety regulations, DOE found that there were not enough data to show that Bakken crude has a significantly higher vapor pressure compared to other U.S. crudes. Despite conducting the most comprehensive survey of Bakken crude to date, DOE reports that more research is still required to compare samples with conventional crude oil. The DOE finding contrasts with a July 2014 PHMSA study concluding that Bakken crude has a higher gas content, higher vapor pressure and lower flash point than other crudes. Based on the PHMSA study, some members of Congress have called for regulations to require “stabilization” of Bakken crude before shipping it by rail.

States

Hydraulic Fracturing Bills Advance in Maryland. Two bills on hydraulic fracturing have advanced in the Maryland General Assembly. A House of Delegates bill would prohibit the state from issuing any permits to authorize hydraulic fracturing for three years. A Senate bill would allow hydraulic fracturing to proceed, however, drilling companies would be subject to strict liability for environmental injuries and would be required to carry at least $1 million in general liability insurance. Maryland has been subject to a de facto moratorium since 2011. The Maryland Department of Environment issued proposed regulations for hydraulic fracturing 12 days before former Governor Martin O’Malley left office. The proposed rules would require at least two years of baseline environmental data to be collected before drilling could begin. The current Governor, Larry Hogan, has generally supported hydraulic fracturing but has not taken a position on either bill, nor moved to withdraw or change the proposed regulations.

New Mexico Allows Produced Water Recycling. The New Mexico Oil Conservation Commission issued a new rule that allows oil and gas companies to reuse produced water from drilling activities. The Commission cited the need to reduce fresh water use by industry and found that new technologies can allow companies to recycle byproducts found in the produced water. Although the Commission touted recycling as reducing environmental impacts, Earthworks, a group opposed to hydraulic fracturing, criticized the rule as a way to reduce costs for drilling companies. Earthworks has been lobbying to ban fresh water withdrawals by the oil and gas industry.

Business

Linn Energy to Pursue Master Limited Partnership. Linn Energy will create a master limited partnership to fund the acquisition of new oil and gas assets with $1 billion in capital provided by Quantum Energy Partners. The partnership will target companies stressed by low oil prices and looking to unload assets, including tight oil assets that have seen decreases in drilling. Under the agreement, described in press reports as a non-binding letter of intent, Linn would have interests ranging from 15 percent to 50 percent in the deals funded by Quantum. The announcement comes on the heels of previous deals by Linn in which other partners provided up to another $500 million in capital over a five-year period to pursue oil and gas acquisitions.

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Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 12

Federal

BLM Issues Hydraulic Fracturing Regulations. On March 20, 2015, the Bureau of Land Management (BLM) issued new regulations governing hydraulic fracturing. The new regulations apply only for wells on federal and tribal land, and are expected to affect approximately 3,500 new wells per year. The regulations cover the full range of hydraulic fracturing activities, including well integrity, chemical disclosure and wastewater storage. Among the key provisions is the requirement to disclose hydraulic fracturing chemicals using the FracFocus registry. The provisions also include a state variance process that can be applied when state regulations meet BLM standards and the requirement to store flowback and produced water in above-ground storage tanks. The rule was immediately challenged by the Independent Petroleum Associations of America and the Western Energy Alliance in U.S. District Court in Wyoming.

States

Ohio: Court Overturns Local Ordinance Banning Hydraulic Fracturing. A judge in Cuyahoga County, Ohio recently overturned an ordinance that sought to ban hydraulic fracturing in Broadview Heights, Ohio, holding that the ordinance was preempted by state law. Plaintiffs Bass Energy Co. and Ohio Valley Energy each had state-issued permits to drill in Broadview Heights but were prevented from doing so by the ordinance. The court held that Ohio’s home rule law for municipalities did not authorize them to exercise police powers that conflict with state laws, including the state’s uniformly applicable oil and gas laws. The decision is consistent with a recent Ohio Supreme Court decision that struck down a similar ban on hydraulic fracturing in Munroe Falls, Ohio.

Michigan Approves New Chemical Disclosure Regulations. The Michigan Department of Environmental Quality has issued revised regulations governing the disclosure of chemicals used in high-volume hydraulic fracturing. The rule, which became effective on March 11, 2015, requires companies to disclose in their permit application the chemicals they intend to use in hydraulic fracturing. Disclosures must be made using the FracFocus registry, as now required for drilling on federal lands. The rule also expands the requirements to provide advance notice of hydraulic fracturing activities, as well as adding new requirements for water quality sampling in the vicinity of the drill site.

Pennsylvania: Third Circuit Affirms Dismissal of Chemical Disclosure Lawsuit. On March 16, 2015, the U.S. Court of Appeals for the Third Circuit affirmed a district court decision dismissing a lawsuit challenging the legality of a Pennsylvania law that prohibits physicians from sharing proprietary information about hydraulic fracturing chemicals obtained during treatment of a patient. The law requires physicians to sign a confidentiality agreement before obtaining any proprietary information. The physician alleged that the prohibition violated his First Amendment rights and was inconsistent with his ethical obligations to share such information with other physicians to advance medical science. The Third Circuit agreed with the district court that the physician lacked standing under federal law, because he failed to allege that he had ever been in a situation where he sought, and was unable to obtain, the information that he now wished to make available to the public.

International

Mexico Issues Guidelines for Hydraulic Fracturing. Mexico’s Environmental Ministry has issued non-binding recommendations for regulating hydraulic fracturing. The guidelines focus primarily on drinking water protection and include recommendations to use 90 percent recycled water for hydraulic fracturing and to adopt monitoring procedures to protect drinking water aquifers. Other recommendations address air quality, soil quality, biodiversity and seismic activity. Binding regulations related to hydraulic fracturing would be issued by newly formed Security, Energy and Environmental Agency (ASEA), which began operations on March 1, 2015. While there are currently no hydraulic fracturing operations in Mexico, the country plans to hold an auction later this year that would allow for development of shale plays in Northern Mexico.

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Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 11

Federal

Environmental and Tribal Groups Sue BLM over New Mexico Drilling Permits.gt; On March 11, environmental and Navajo tribal groups filed suit in federal court in New Mexico against the Bureau of Land Management (BLM) challenging permits issued by BLM for gas development in the vicinity of the Chaco Culture Natural Historical Park, an area that contains many Navajo communities as well as extensive ancient ruins and ceremonial sites. The area is also home to the Mancos Shale, a large, relatively undeveloped formation believed to hold trillions of cubic feet of natural gas. Drilling does not occur within the park itself, but the lawsuit alleges that artifacts outside of the park’s borders will be damaged by increased drilling operations, traffic and air emissions. The groups allege BLM’s approval of over 100 permit applications near the park, without the use of an Environmental Impact Statement, violates the National Environmental Policy Act, as well as the Administrative Procedure Act and National Historic Preservation Act.

FERC Publishes Rule to Govern Protests During Public Meetings. The Federal Energy Regulatory Commission (FERC) issued Order No. 806 this week, prohibiting signs, spontaneous comments and physical demonstrations at open meetings. FERC expressed concern that the Commission will be unable to address agenda items due to the growing number of protests during public meetings concerning energy resource development using hydraulic fracturing. Going forward, protestors that disrupt proceedings will be escorted from meetings. The rule will be published in the Federal Register and take effect thirty days later.

States

California Closes Wastewater Injection Wells Following Oversight Hearings. The California Senate Environmental Quality Committee and Senate Natural Resources and Water Committee recently found that state regulators have allowed injection of wastewater into federally protected aquifers, in violation of the Safe Drinking Water Act. In response, the state issued a number of cease-and-desist orders to well operators, after the State Water Resources Control Board found twelve wells were too close to drinking water sources. U.S. Environmental Protection Agency is also now involved in the oversight and has given the state a list of deadlines to review the remainder of its wells. The next deadline is May 15, when the state must complete its evaluation of all wells that dispose of wastewater in the state’s cleanest water bodies.

Maryland Continues to Weigh Oil and Gas Legislation. The Maryland House considered a bill this past week regarding the use of hydraulic fracturing to develop energy resources within the state, with legislators remaining split on the proposals. Under regulations proposed under previous Maryland Governor O’Malley (D), drilling would not begin for at least three more years, and even then will be restricted in some parts of the state. Industry groups and supporters appear poised to move forward with regulations, pointing to a three-year study performed by the former Governor’s administration that regulations could lower risks. Still, opponents argue that the regulations are not yet sufficient and are calling for an eight year moratorium on hydraulic fracturing until additional studies can be performed to evaluate health and environmental impacts.

Pennsylvania Proposes Revised Aboveground Drilling Regulations. Pennsylvania has proposed additional standards for noise and wastewater storage, along with increased protections for schools and other structures located near well sites. The Department of Environmental Protection has been researching and drafting the proposed regulations, which would be the first major revision of the current regulations, since 2011. The regulations propose to designate some sites, including schools, as public resources that require additional permits or well location considerations. Other rules would govern wastewater pits and impoundments and also monitor noise levels. During public meetings in 2013, the agency received thousands of comments and the agency has been working to address the comments, as well as recent legal decisions. A thirty-day comment period on the rules begins in April, with the final regulations expected to go into effect in 2016.

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Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 10

Federal

Federal Railroad Administration Issues Proposed Rule on Disaster Planning. In a notice of proposed rulemaking, the Federal Railroad Administration (FRA) outlined new regulations for risk reduction programs (RRPs) that include scenarios involving derailments and the release of hazardous materials. Although the proposed rulemaking was required under the Rail Safety Improvement Act of 2008, recent concerns over releases of Bakken crude oil are reflected in the proposed RRPs. Each plan would be required to include a risk analysis and technology implementation plan submitted to and approved by the FRA. Implementation plans would be subject to both internal and external audits. Previously, industry groups have expressed significant concerns about publicizing crude oil train routes and planning for a worst case scenario, citing security concerns. Under the proposed rule, the RRPs would be exempt from disclosure under the Freedom of Information Act as well as from discovery or admission into evidence in any state or federal court lawsuit. The FRA will take comments on the proposed rule until April 28, 2015. The move is one of several the Department of Transportation (DOT) and its subsidiary agencies could take with respect to crude oil rail shipments. On Capitol Hill, Sen. Charles Schumer (D-NY) called for the DOT to create procedures to “stabilize” Bakken crude, and Senator Maria Cantwell (D-Wash.) announced she is developing a bill that would accelerate the phase out of existing DOT-111 tank cars and increase the minimum hull thickness for railcars that carry oil and petroleum products.

States

Citadel Exploration Challenges San Benito Ban. In a complaint filed in California Superior Court, Citadel Exploration alleges that a ban San Benito County, California’s ban on hydraulic fracturing and other well stimulation methods is illegal. According to Citadel, the Department of Conservation’s Division of Oil, Gas and Geothermal Resources has the sole power to regulate oil and gas operations, precluding local bans like the San Benito prohibition passed by ballot initiative in November 2014. Citadel has about 20 active wells in the county, however, they are stimulated by cyclic steam injection which is prohibited under the ordinance. According to the complaint, San Benito county authorized cyclic steam injection at the wells in 2013, just a year before the ban passed. The company is seeking $1.2 billion in damages from the diminished value of its property rights unless it is granted an exemption.

California Shuts Down Kern County Injection Wells. California’s Division of Oil, Gas and Geothermal Resources (DOGGR) shut down 12 underground injection wells operated by six different companies. DOGGR stated that it ordered the Kern County wells shut down and the operators to sample water supply wells within a one-mile radius of their operations. The agency did not comment on whether there were data showing the injection wells have actually impacted groundwater. DOGGR has been evaluating the state’s nearly 50,000 underground injection wells since the summer of 2014, after the state discovered that it granted permits to wells operating near potentially non-exempt aquifers. An EPA review of California’s Safe Drinking Water Act program found “serious deficiencies” in its oversight of underground injection wells, requiring the state to produce a compliance plan by February 2017.

La Habra Heights, California Votes Down Hydraulic Fracturing Ban. Voters in La Habra Heights, California, a Los Angeles County community with approximately 5,000 residents, rejected a ballot measure that would have prohibited new oil and gas wells that would use hydraulic fracturing. The Heights Oil Watch, which pushed the ballot initiative, said that the ban was necessary to protect water supplies and air quality. Oil companies operating in the city, however, along with noting the economic benefits of oil and gas development, said that any ban would be challenged in court, leading to significant litigation expenses.

Colorado Finalizes Flood Mitigation Rules. The Colorado Oil & Gas Conservation Commission finalized standards for shutting-in new and existing oil and gas wells operating in floodplains. The standards consist of best management practices, such as the replacement of earthen berms around storage tanks with steel barriers, anchoring critical equipment, the elimination of production waste pits and remote shut-in capabilities. Operators must also register all wells and equipment with the Oil & Gas Conservation Commission by April 1, 2016. The best management practices become effective on June 1, 2015 for new wells and equipment, and on April 1, 2016 for the retrofit of existing wells and equipment. The Oil & Gas Conservation Commission estimated that approximately 2,650 wells and related equipment were impacted by 2013 floods, and the new standards are intended to prevent releases in future flood events.

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Sidley Shale Gas and Hydraulic Fracturing Report

Vol. 4. No. 9

Federal

FracFocus Announces Planned Improvements to Chemical Reporting Registry. As part of their commitment to make data available to the public, the Ground Water Protection Council (GWPC) and Interstate Oil and Gas Compact Commission announced plans to make changes to the FracFocus hydraulic fracturing chemical registry to improve the quality, transparency and accessibility of reported information. Among other changes, the planned improvements include a revised reporting format that would allow companies to enhance reporting of chemical names separately from their specific fracturing fluid product. FracFocus expects the improvements will allow for increased reporting to the public, while still allowing protection of trade secrets. These and other planned changes may expand the use of FracFocus as the reporting tool approved by state governments that currently require companies to report the contents of fracturing fluids. The Bureau of Land Management has also proposed to use FracFocus as a reporting tool in its proposed revisions to regulations governing oil and gas development on federal lands.

States

Colorado: Hydraulic Fracturing Task Force Recommends Nine Legislative and Regulatory Policy Changes to Governor. Colorado’s oil and gas task force approved nine recommendations for improving oil and gas development. The recommendations include provisions to incorporate oil and gas development into comprehensive local planning processes, to increase the role of local government liaisons in the process of issuing drilling permits, to increase Colorado Oil and Gas Conservation Commission staff and inspectors, to conduct health studies, to develop an oil and gas information clearinghouse and to reduce truck traffic on public roads and streets. Other recommendations that did not receive the required support — including a proposal to give decision-making authority over oil and gas development to local governments — will be included in a minority report to Gov. Hickenlooper. The recommendations are non-binding and require legislative or regulatory action to be implemented.

California: Environmental Groups Urge Governor to Impose Emergency Order Banning Hydraulic Fracturing. On February 26, 2015, a group of environmental organizations petitioned California Gov. Jerry Brown to use his emergency powers to stop hydraulic fracturing and acid well stimulation in the state. The petition claims the Department of Conservation’s recently issued hydraulic fracturing regulations are insufficient to protect against risks to groundwater and surface water from drilling activities, as well as disposal of drilling wastewater. The regulations are currently scheduled to take effect in July of this year. The petition asks the governor to declare a state of emergency and ban hydraulic fracturing until a comprehensive review of health and environmental impacts is conducted. By law, the governor has thirty days to respond to the petition.

International

European Union: Survey Shows Diversity in Hydraulic Fracturing Regulations Among Member States; EU to Consider Need for Hydraulic Fracturing Law. A recent survey of European Union (EU) member states showed significant diversity among members in the nature and scope of hydraulic fracturing regulations. Overall, a majority of EU members have no plans to authorize hydraulic fracturing while six states — Denmark, the Netherlands, Poland, Romania and the United Kingdom — have issued or are considering issuing licenses for oil and gas development using hydraulic fracturing. Six additional countries indicated that they may consider granting such licenses in the future. The EU intends to use the results of this survey to assess whether to propose uniform requirements that would govern the use of hydraulic fracturing throughout the EU. To date, the EU has only issued non-binding guidance for member states that license hydraulic fracturing activities.

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